Automatic Stay Upon Filing
The moment you file for bankruptcy, an automatic stay goes into effect. This immediate action halts any collection efforts from creditors, including the IRS. They must stop wage garnishments, levies, and any other actions they were about to take against you. However, this doesn’t mean they can never resume these actions; they just have to stop for now.
IRS Actions During Bankruptcy
While the automatic stay provides temporary relief, the IRS can petition the bankruptcy court to continue certain collection activities. For example, if the IRS has a lien on your property—like your home—they might ask the court for permission to enforce that lien. They can argue that they have a perfected security interest and priority over other creditors, especially if there’s no mortgage holder with a superior lien position.
Discharging Tax Debts in Bankruptcy
You can discharge some tax liabilities through bankruptcy, but specific rules apply:
- Filed Tax Returns: The tax debt must be from a return you filed yourself. If the IRS filed a substitute return because you didn’t, that debt isn’t dischargeable.
- Age of Tax Debt: The tax liability must be for a tax year at least three years old. Newer tax debts aren’t eligible for discharge.
- Assessment Timing: The tax must have been assessed by the IRS at least 240 days before you file for bankruptcy.
So, if you have tax liabilities from returns filed three, four, five, or even nine years ago, and you filed those returns on time, those debts are often dischargeable in bankruptcy.
Non-Dischargeable Tax Debts
Not all tax debts can be wiped out. Recent tax liabilities, trust fund taxes like payroll taxes, and fraud penalties are typically non-dischargeable. These debts will remain, and the IRS can resume collection efforts once the bankruptcy case is closed or the automatic stay is lifted.
IRS Collections After Bankruptcy
For non-dischargeable tax debts, the IRS retains the right to collect after your bankruptcy proceedings conclude. They may employ various methods, such as issuing levies on your bank accounts or placing liens on your property, to recover the amounts owed.
Why Understanding This Matters
Knowing which of your tax debts can be discharged helps you make informed decisions. Filing for bankruptcy might eliminate significant portions of your IRS debt, providing a clearer path to financial stability. However, misunderstanding these rules could leave you with unexpected liabilities even after bankruptcy.
Consult a Professional
Bankruptcy laws are complex, and IRS regulations add another layer of intricacy. It’s crucial to consult with a qualified tax attorney who can guide you through the process, ensure you meet all the requirements, and help you understand the implications for your specific situation.
Take the Next Step
Navigating bankruptcy and IRS collections can be overwhelming, but you don’t have to do it alone. If you’re considering bankruptcy or have questions about your tax liabilities, I’m here to help. Schedule a consultation today to get personalized advice tailored to your unique situation. Let’s work together to find the best path forward for your financial future.
