IRS Tax Debt and Bankruptcy

Bankruptcy offers many debtors a remedy to wipe out IRS tax debts when all other remedies such as a offer and compromise have been rejected. In addition, for many debtors, the bankruptcy remedy is superior to any other remedy. Bankruptcy IRS tax law is very complicated and requires significant consultation with a bankruptcy attorney. The basic rule is that income IRS taxes more than three years old can be discharged  in bankruptcy if they meet a three part test. The taxes must have become due more than three years prior to filing and there is also an assessment rule.

An example of how a Chapter 7 bankruptcy could help an individual follows. Say in a hypothetical situation a person owes 50k in income taxes from 2013 (it is now 2023). We will also assume the tax returns were filed on time and the IRS tax assessment rule was met. In a case like this, the Chapter 7 bankruptcy would discharge the 50k in taxes. In a Chapter 13 bankruptcy, the 50k could be discharged in some situations for a pennies on the dollar if other income and asset factors are met. In many cases, the Chapter 13 bankruptcy requires a debtor to pay a portion of the tax debt in full and another portion at pennies on the dollar. The reason for this is that some of the debt is labeled as “priority debts“. This means the tax debt is probably no older than three years old or other factors apply such as the tax return for a particular year was never filed.

IRS tax liens are also dealt with in Chapter 13 bankruptcy cases. In some situations the Chapter 13 has the ability to “value” the tax lien. In laymen’s word, the plan is able to pay a much smaller amount than the tax lien. If you have tax liens, feel free to call to set up a consulatation to see if your liens can be valued in a Chapter 13 Plan.

The combination of IRS taxes and bankruptcy law is very complicated. So if you have significant IRS tax debt, consulting a bankruptcy attorney on the benefits of filing a Chapter 7 or Chapter 13 bankruptcy is highly recommended. The Stone Law Firm has offices in Greenville, Columbia, Florence, and Irmo. We also offer telephonic and zoom consultations to help determine if bankruptcy can help your tax debt problems.

- Stone Law Firm