Can You File Bankruptcy on IRS Debt?

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Unpaid taxes can add up to a huge financial burden, especially on top of all your other expenses. And with more and more people freelancing and the gig economy in full swing, it’s not uncommon for people to have IRS debt. If you’re feeling overwhelmed by your financial situation, you may be considering bankruptcy. Bankruptcy is a good way to clear unsecured debt, but what about tax debt? This post explores the question of what happens with tax debt when you file for bankruptcy.

Automatic Stay

The moment that you file for bankruptcy, whether it is Chapter 7 (most commonly) or Chapter 13, all your creditors must stop harassing you for payment. That includes the IRS. So no more threatening letters, phone calls, etc. The automatic stay also applies to property. The IRS can’t touch your more valuable assets. So no matter what stage the IRS collection effort is in, the automatic stay stops it completely. However, an automatic stay is just a pause. If you want to eliminate IRS debt as well as other debts, choosing the right time to file for bankruptcy is crucial.

Conditions for Tax Debt to be Discharged

You may be unsurprised to learn that IRS rules and regulations are like an impenetrable maze. There is a regulation for almost everything, including specific rules for bankruptcy discharge. You should expect that the IRS will object to eliminating your tax debt if it can find any reason to do so. That’s why it is especially important to have expert legal counsel if you are trying to eliminate IRS debt.

Income Taxes

Chapter 7 bankruptcy only discharges income tax debt. Your 1040 taxes are obviously income taxes, but other taxes are not. For instance, property taxes and trust fund taxes are definitely not income taxes. So the kind of taxes you owe the IRS makes all the difference. If you do owe unpaid income taxes, then that IRS debt can be discharged. Then there are some rather complicated regulations dependent on timing.

Taxes Filed for Last 2 Years

You have to have filed your taxes for at least the last 2 years (if you were required to file). At the time you file for bankruptcy, the IRS needs to have your tax filings for the previous 2 tax years, and that applies whether or not you filed those taxes on time. If you didn’t file and the IRS prepared substitute returns to determine what you owed, those do not count as taxpayer-filed returns.

Tax Debt Must Be at Least 3 Years Old

Your income tax debt must be at least three years old. And it’s crucial to remember that Tax Day is not always April 15. Some years, it could be the 16th, 17th, or even 18th. In 2020 it was July 15 because of the COVID-19 pandemic. IRS lawyers have been known to object to discharge if the timing is off even by one or two days. So, make sure you file the petition on the correct day, or else you will have to start over.

240 Day Rule

Your tax assessment can’t be more than 8 months old, or must not have been assessed yet. If the IRS has not assessed the debt within the last 240 days, the income tax debt is not dischargeable. It’s almost impossible to tell if the IRS has assessed the debt or not, because this process is an internal accounting tool. But generally, if you’ve not received a bill which breaks down the amount due by tax years, the IRS has probably not assessed the debt yet.

Burr Law Helps with Complexities

At Burr Law, our professionals have years of experience dealing with bankruptcy law. We understand the complicated IRS rules around bankruptcy, and will work with them to make sure your tax debt is included in your bankruptcy. Don’t leave something this important to chance.