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Bankruptcy & IRS Taxes

Many taxpayers are under the false belief that filing bankruptcy will wipe out their tax debts forever!  Unfortunately, not everyone qualifies to wipe out their tax debt in bankruptcy. Certain stringent rules have to be met first. If you file bankruptcy and don't meet the rules, the IRS will still be in hot pursuit after your bankruptcy is over.

The truth of the matter is that if you are considering filing for bankruptcy solely for purposes of eliminating your IRS tax debt, then bankruptcy may not be the best solution for you.  Our CPA Firm offers taxpayers other options for resolving their IRS tax liabilities.  This includes considering an Offer in Compromise, Installment Agreement, Partial Pay Installment Agreement or placement on Currently Not Collectible status. 

However, if your IRS tax debts are one of many debts you have, filing for bankruptcy protection may be an option.  Please note that in order to obtain tax debt relief through bankruptcy your IRS taxes must qualify and meet certain rules, otherwise your tax debts will not be discharged or wiped out.  For example, the following IRS tax debts cannot be eliminated under a Chapter 7 Bankruptcy unless all five tests below are met:

1.        The 3-Year Rule: Taxes for which a tax return was due to be filed within three years (plus extensions) prior to the date of filing bankruptcy. For example, the tax return for 2007 income taxes was due to be filed on April 15, 2008 (plus any extensions), and therefore, these income taxes cannot be discharged by filing bankruptcy on or before April 15, 2011 (plus the time of extensions).  If an extension was filed, then it means August 15 or October 15 of that year, or beyond to the actual filing date.  If the 15th falls on a Saturday or Sunday, the return wasn't due until the following Monday; OR

2.       The 2-Year Rule: Taxes for which a tax return was filed late and filed within two years prior to filing bankruptcy (IRS filed "Substitute for Returns" doesn't count); OR

3.       The 240-Day Rule: Taxes assessed by the IRS within 240 days before the filing of bankruptcy.  Assessment date is the date that tax liability is entered on IRS records; OR

4.       The Pending Taxes Rule: Taxes not yet assessed but still assessable; OR

5.        The Tax Fraud/Evasion Rule: Taxes of a debtor who committed fraud related to a tax return or willfully attempted to evade or defeat taxes sought to be discharged.

Income taxes that fail any of the above five tests are not dischargeable or wiped out in a Chapter 7 Bankruptcy.           

In addition, businesses cannot wipe out taxes through bankruptcy.  Bankruptcy offers no relief from a Trust Fund Recovery Penalty, which are taxes for which the debtor/taxpayer was responsible for collecting from others such as FICA taxes withheld from employees, but failed to remit the payroll taxes to the IRS.  Bankruptcy also will not relieve liability for excise taxes such as estate and gift tax, sales tax, or fuel taxes.  Furthermore, IRS tax debts that are not wiped out are considered priority debts and must be paid in full within a Chapter 13 Bankruptcy plan. 

Lastly, even in cases where IRS taxes are wiped out through bankruptcy, it doesn't necessary mean that you get to walk away from all your tax debt.  In the course of its collection efforts, the IRS has the power to file a Federal Tax Lien to perfect its tax claim against individuals.  A tax lien, once filed, becomes a secured lien on all of the taxpayer's property.  If a tax lien is in place prior to your filing bankruptcy, the IRS's secured tax lien has priority over the bankruptcy filing, and bankruptcy cannot eliminate the lien from your property. Even property which would otherwise be exempt in a bankruptcy, such as homestead, cannot be sold or transferred without payment of the IRS tax lien.  In this instance, bankruptcy provides no tax relief.  Taxpayers are sometimes shocked to discover that the IRS is still harassing them even after bankruptcy discharged all or some of their taxes because the IRS had already filed a Federal Tax Lien before the bankruptcy petition had been filed.  Sadly, some taxpayers do not discover this until the IRS garnishes their paycheck or levy's their bank accounts.    

Proper pre-bankruptcy planning is key to determining if bankruptcy is or can be a viable solution for resolving your IRS tax problems. 

Our goal at Gonzalez & Company, CPA, PA is to resolve your tax problems and get you back on track with your life.    

We can help you with any IRS Tax Problems, including:

·         IRS Audit Representation

·         Unfiled Tax Returns

·         Unpaid Taxes

·         Payroll Tax Problems

·         IRS Liens

·         IRS Levies

·         IRS Wage Garnishment

·         IRS Seizures

·         IRS Offer in Compromise

·         IRS Installment Payment Plans

·         Innocent Spouse Relief

·         Obtaining your IRS File

Please complete the form below to receive a Free Consultation and Tax Analysis with a Miami Certified Public Accountant (CPA).   

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