We Help Discharge Taxes in Bankruptcy
You probably found us by searching for “bankruptcy and taxes” or “bankruptcy tax attorney.” We are glad you did. We are a Houston tax law firm and we help taxpayers discharge tax debts in bankruptcy.
Generally, older Federal income tax debts are dischargeable in bankruptcy. By “older” we are referring to tax debts more than three years old and for which the tax return, if one was to be filed, was filed more than 240 days prior to filing the bankruptcy petition.
While individual income taxes can be dischargeable in bankruptcy, business income taxes and trust fund recovery penalties are not dischargeable.
What are the Benefits of Filing Bankruptcy for Taxes?
There may be more benefits to filing bankruptcy than discharging unpaid taxes.
Bankruptcy can also help:
1. Stop the IRS collection efforts. Bankruptcy may be a viable option to prevent the IRS from levying on wages or other assets.
2. Discharge some IRS tax penalties.
3. Stop the accrual of interest on unpaid tax debts during the bankruptcy proceeding.
4. Protect your residence from a forced sale.
5. Redetermine the tax liability (and force the IRS to settle your taxes).
These are just a few examples.
If the tax debt and penalties are not dischargeable in bankruptcy, then it is still possible that the tax debt and penalties can be restructured in bankruptcy.
The bankruptcy payment plan may be better than the installment payment plan afforded by the IRS. There are several examples of taxpayers getting a better deal in bankruptcy than they would outside of bankruptcy.
What to Consider Before Filing Bankruptcy for Taxes
There are several aspects and disadvantages to filing for bankruptcy that must be considered.
One such disadvantage is that the IRS’s liens may survive the bankruptcy process. This can be problematic if there are assets that are excluded from the bankruptcy (such as retirement accounts) rather than exempt assets (such as personal residences, etc.). The lien will continue to attach to the excluded (not exempt) assets even though the taxpayer’s personal liability for the unpaid tax debts is discharged in bankruptcy.
The IRS’s post-bankruptcy collections activities can also be problematic. To the extent that all of the tax debt is not discharged in bankruptcy, the IRS may view the taxpayer (who now has fewer debts) as being in a better position to pay the IRS.
The ability to keep tax refunds in bankruptcy can pose additional complications. Here is another example of a bankruptcy dispute over tax refunds. Even recouping prepaid taxes in bankruptcy can be problematic.
Taxpayers may still be able to borrow money and pay the IRS, and then discharge the loan. Congress did not limit this in its 2008 bankruptcy reform, it just limited the ability of non-attorneys from advising clients on this issue.
The IRS may also try to use the bankruptcy rules to its advantage. For example, in at least one case, the IRS attempted to collude with the bankruptcy trustee to void the taxpayer’s homestead exemption. The courts have held that taxpayers cannot get damages for emotional distress when the IRS violates the bankruptcy tax rules.
The IRS Lien Notice
The IRS’s lien notice can also pose problems even after taxes are discharged in bankruptcy.
If a taxpayer receives a bankruptcy discharge and that taxpayer’s tax liabilities are dischargeable, the taxpayer is no longer personally liable for the taxes and the IRS is enjoined from collecting the liability from the taxpayer personally. See 11 U.S.C. § 524(a); see also In re Rivera Torres, 309 B.R. 643, 647 (1st Cir. B.A.P. 2004). If, however, the IRS filed a Notice of Federal Tax Lien before the bankruptcy petition date, the lien continues to attach to prepetition property of the taxpayer that was exempt or abandoned from the estate once the bankruptcy is discharged. 11 U.S.C. § 522(c)(2)(B); Waldeigh v. Commissioner, 134 T.C. 280 (2010). A lien remains attached to property excluded from the estate, such as an ERISA-qualified pension plan, even if a NFTL was not filed before the petition date. United States v. Rogers, 558 F. Supp. 2d 774 (N.D. Ohio 2008).
This has to be considered if the primary reason for filing bankruptcy is to avoid an IRS lien.
Experienced IRS Bankruptcy Attorneys
The bankruptcy tax laws are constantly changing. An experienced tax attorney who follows this area of law can help you determine if bankruptcy is a viable option for resolving your tax debt.
Please call us at (713) 909-4906 or schedule an appointment with our bankruptcy tax attorneys.
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