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“I” Is for Internal Revenue Service (IRS) Tax Debt in Bankruptcy

Posted by Peter Behrmann, Esq. On March 30th

“I” Is for Internal Revenue Service (IRS) Tax Debt in Bankruptcy

Debt owed to the Internal Revenue Service and the State of Michigan can be discharged in bankruptcy in certain situations!

One of the most common misconceptions about personal income tax debt owed to the IRS is that is cannot be discharged in bankruptcy. 

 However, IRS tax debt can be discharged in a chapter 7 or a chapter 13 Bankruptcy if the following five part rule is met:

  1. The due date for filing a tax return is at least three years before you filed bankruptcy.  This means that as of April 16th of this year any taxes owed from 2008 backwards could be completely discharged in bankruptcy.
  2. The tax return was filed at least two years prior to you filing bankruptcy.  This means if you were filing bankruptcy on April 16th of this year to discharge 2008 taxes, you would have had to file your 2008 taxes before April 15th of 2010.
  3. The tax assessment is at least 240 days old.   Under normal situations, this is not an issue, because most taxes are assessed when filed, or soon thereafter.  This would be an issue if you were recently audited and just received an assessment, or have been attempting to do an offer in compromise with the IRS then you might have to wait the required 240 days before you could discharge your tax debt in bankruptcy.
  4. The tax return is not fraudulent.  Just like in bankruptcy normally, debts created by fraud are not dischargeable in bankruptcy. 
  5. The taxpayer is not guilty of tax evasion.  Basically, you cannot be intentionally trying to avoid your tax liability, and then file bankruptcy. 

Keep in mind that these rules only apply to personal income tax debt.  These rules do not apply to trust fund tax debt (Sales tax, payroll taxes, etc) as these are not dischargeable in bankruptcy.  Further, if the IRS has filed a tax lien on your property the filing of your bankruptcy will not remove the tax lien, it will just remove your personal liability on the debt owed to the IRS, meaning you will still have to pay off the tax lien in order to sell your property in the future. 

In certain situations where you are not eligible to discharge tax debt in Chapter 7 Bankruptcy, a Chapter 13 repayment plan may better treat your situation.  In a Chapter 13 bankruptcy, we can treat your recent tax debt to the IRS and the State of Michigan in a repayment plan where the tax debt is paid back at 0% interest over a three to five year period.  This is often a much better choice then directly paying the IRS, because they continue to incur interest and late fees that they are prohibited from doing when you file a Chapter 13 Bankruptcy.

 

Photo Credit:  Leo Reynolds

 

Peter Behrmann is a Michigan bankruptcy attorney.  From my Livonia, Michigan location, I represent clients throughout Metro Detroit and beyond, including Garden City, Wayne, Westland, Redford, Dearborn, Taylor, Ann Arbor, Belleville, Northville, Novi, Farmington, Farmington Hills, Plymouth, Canton, and the Counties of Wayne, Oakland, Livingston, and Washtenaw. My practice is limited to helping consumers like you file Chapter 7 and Chapter 13 Bankruptcy.

 

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