Howard's IRS and the Law Blog

Can bankruptcy get you out of a bind with the IRS and eliminate your tax debt?

If this was a true or false law school exam, I would say that’s a trick question.  The answer is both – bankruptcy can discharge tax debt, and it can’t.

Huh?

There are many rules in the bankruptcy code that must be followed to have a tax debt discharged. And those rules make some taxes dischargeable, and some not. You can’t always just file bankruptcy and poof!, the IRS is gone.  But if you know the bankruptcy discharge rules, and follow those rules before you jump in, then yes, bankruptcy can be a friend in solving your IRS problem.

Here it is a nutshell:  Bankruptcy makes some debts easy to discharge, like credit cards and medical bills.  This is because Congress does not consider those debts to be of a type where extra effort has to be exerted for a fresh start.

Congress gives the IRS a chance to collect unpaid taxes before they can be discharged in bankruptcy.  That is different from, say credit cards, where there is no direct law giving credit card companies time to collect the debt before you can say bye-bye to them.  Congress has also made some taxes – like unpaid payroll taxes, or tax fraud – never dischargeable in bankruptcy.

Sometimes, you are ready to file bankruptcy and we determine that the time the IRS is allotted to collect has already expired, and you can immediately file bankruptcy and be done with your taxes, whether the IRS likes it or not.

Other times, we may have to put the IRS on hold and buy a little bit of time to get your bankruptcy filed so your taxes can be eliminated.

And there may be times where your taxes cannot be discharged in bankruptcy no matter how long you wait to file, such as when you owe employment taxes, have tax fraud, or your debt is the result of an IRS substitute for return.

Here, then, are the rules to making the IRS go away with bankruptcy.

First, the timing rules – how old must your tax debt be to wipe out the IRS in bankruptcy – there are three main rules to follow:

     1.  Three Year Rule.  Your bankruptcy must be filed at least three years after your tax return was due to filed with the IRS, including extensions.

Example:  You owe the IRS for 2010 taxes.  Your 2010 tax return was due to be filed with the IRS on April 15, 2011.  Your tax debt is eligible for bankruptcy after April 15, 2014.

and

      2.  Two Year Rule.  Your bankruptcy must be file at least two years after your tax return was actually filed.

Example:  You owe the IRS for 2010 taxes.  You filed the return late – on June 1, 2013.  Your debt is eligible for bankruptcy after June 1, 2015.

and

      3.  240 Day Rule (usually, eliminating tax debts from an IRS audit).  Your bankruptcy must be filed at least 240 days after the IRS puts the balance you owe on its books (called an assessment).  This rule usually applies in audit scenarios, when the IRS finds you owe them money after your return has been filed.  After the audit is complete and the IRS puts the money owed on its books, you have to wait 240 days to file the bankruptcy.

Example:  Your 2010 tax return was due on April 15, 2011, and filed on time.  The IRS then audited you, with audit completed and tax owed put on the IRS’ books on February 1, 2014 (assessment).  Your tax debt is eligible for bankruptcy on October 1, 2014, which is 240 days after the audit assessment was made, and more than three years since the return was filed.

All three of these rules – the Three Year Rule, the Two Year Rule, and the 240 Day Rule – must be met before you file bankruptcy.

But be careful – there are traps to avoid on the way to beating the tax bankruptcy timing rules.  Avoid these actions, which can extend the timing rules:

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Losing your house to the IRS may be your worst fear.  And it’s true that the IRS can seize and sell a home to pay a back tax debt.  But it is harder – and less likely – than you what you may have read or believe.

To begin with, the Department of Justice seizes and sells houses for unpaid taxes, not the IRS.  To sell a house, the IRS makes a referral over to the Department of Justice; the IRS does not sell houses on its own. Unless you have heard from the Department of Justice Tax Division, your house is not in the process of being sold.  And rest assured, the Department of Justice does not get involved in many unpaid tax cases – the IRS is usually pretty picky and choosy about what cases they send to the Department of Justice.

How many houses do you think the Department of Justice forecloses on every year because of a tax problem?  25,000?  10,000?  5,000?  1,500?

If you thought those numbers seem too high, you are correct.  In 2013, for example, the IRS Data Book reports that there were 547 seizures of real property (houses) and personal property (cars) made.  That’s out of over 11 million tax accounts in the IRS’ inventory.  547 out of 11,000,000.  Chances are, the IRS is not interested in your house.

The IRS is not a maniacal house-seizing machine that relishes the thought of putting people out on the street.  Referring a case to the Department of Justice to deprive a taxpayer of his house is usually the last, not the first, thing the IRS wants to do.

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When the IRS Comes Calling: Settling with the Tax Man

by Howard S. Levy, Esq. on September 28, 2014

in IRS Collection Problems

What do you do when the IRS knocks on your door?  Fear, anxiety, jail time – many different ideas pop into mind about what the government will do because of a failure to pay taxes.  A knock on the door from the IRS is extremely important, but most of what you fear is more myth than reality.

Your anxiety:  Is the IRS going to show up one day and seize my house?  Levy on my income so I cannot provide for my family?  Shut down my business?  Take my retirement account? Put me in jail.

The answers may surprise you, and your fears are usually bigger than the reality.

On Thursday, October 2, 2014, I will be giving a live webinar with myLawCLE.com that will give you the knowledge of how the IRS works, how to defend against aggressive IRS actions, and ultimately, reach settlement and case resolution.  The webinar is at 9 am PST, 10 am MST, 11 am CST and 12 pm EST.

Here is the agenda of what will be covered:

  1. Knock, Knock – Who is at My Door from the IRS?
  2. The Power of the IRS to Destroy: What Can the IRS Really Seize, and What Are the Likely Sources?
  3. IRS Seizure Process: Is There Due Process in IRS Collections?
  4. IRS Collection Enforcement Priorities: Is it Likely that the IRS Will Take a House?  Retirement Account?
  5. Settling with the IRS: Offers in Compromise – Myths vs. Reality.
  6. Negotiating Payment Agreements: Providing the IRS with Financial Statements.
  7. IRS Forbearance: Convincing the IRS to Leave an Unpaid Tax Debt Alone.
  8. Yes, My Dear, Bankruptcy Can Eliminate an IRS Tax Debt: Here’s How.
  9. How Long Can the IRS Collect a Tax Debt? Expiration Dates on the IRS Collection Power.

To learn more, please visit MyLawCLE.com.

Believe it or not, the IRS really does not want to levy your wages and take your paycheck.

An IRS levy is usually issued when all else fails.

There are three things the IRS wants if you owe them back taxes and not providing those three items usually results in the IRS levying.  Here is what the IRS wants:

1.     Communication.  Yes, the IRS wants to hear from you.  If they have written you a letter, they want a response.  If an IRS Revenue Officer has called you or stopped by your house, he wants to hear back from you.  In other words, IRS collection employees have a job to do: figure out how the IRS can collect taxes.  You are in the center of their job.  Ignoring IRS efforts makes their job harder.  That makes the IRS unhappy.  We want to satisfy the IRS so they leave you alone.  A happy IRS is good for you.

I always tell my clients that when your head is in the mouth of the bear, say nice bear.  The harder you make it for the IRS, the harder they will likely make it for you.  That means cooperation, not avoidance.  (I understand that it is human nature to want to avoid the IRS, and that’s okay, but to solve an IRS problem, the IRS needs communication.)

The good news is that I have spent the last 20 years talking to the IRS – you don’t have to speak with them, leave it to me.

2.     Compliance.  If you owe back taxes, the IRS wants to make sure that you stop the problem.  That means paying your taxes going forward.  If you are self-employed, it is likely you owe the IRS because you did not make estimated tax payments on your income – you got paid, but the IRS did not.  A simple solution is to open up a separate bank account – put your name on it, and ask the bank to title the account as an Estimated Tax Account.  Every time you get paid from a customer, take 15-20% of the gross check, and immediately put it in the estimated tax account.  Every quarter, the money you have set aside is paid to the IRS.  And then, you should be in compliance with your IRS future tax obligations.

If you have unfiled tax returns, the IRS wants those returns to be filed.  In most cases, the IRS considers filing of the last six years’ returns as being in compliance.  If you don’t have all of your W2s, or 1099s, we can readily obtain them from the IRS.

If you are not current in paying your taxes, or in filing your returns, the IRS will desire to take matters into their own hands, and levy your wages and bank accounts.  It doesn’t have to be that way, and in fact, the IRS prefers communication and compliance to levying.

3.     Financial information on how you can – or cannot – repay the taxes.  You owe the IRS money, and they want to know how they can collect it.  And that does not mean that they can collect it – the IRS has numerous programs available to you if you are unable to pay.  The IRS has a debt settlement program, known as an offer in compromise.  The IRS also has a program to prevent you from being put in a state of economic hardship from a wage or bank levy, known as currently uncollectible.  (When you are currently uncollectible, the IRS agrees to not take any action to collect your debt.)  Or you may qualify for a payment agreement.

But the IRS will not know what option you qualify for if communication is poor and if we do not tell them.

Without financial information on how you can – or cannot – repay the taxes, the IRS will take matters into its own hands and levy your bank accounts and wages to get paid.

Communication, compliance and financial information gets levies on wages and bank accounts released.

That’s all the IRS wants – is to hear from you, and to see that you will pay and file your taxes going forward, and will work arrangements to pay – or even not pay – what is owed.  Providing that information not only stops them from levying, but gets levies released.

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