If the IRS is threatening you with letters and you’re feeling financial stress at the same time, you might be wondering if bankruptcy is the answer. You might also be wondering if bankruptcy could clear you of your debts to the IRS. In this article, you will find the answers to these questions, along with a lot more need-to-know information.
Bankruptcy and the Automatic Stay
If you find yourself in debt with the IRS, possibly on top of other creditors you might be receiving some threatening letters. At first, the IRS will send you reminders of past taxes. These letters will become evermore threatening until they turn into legal notices. These notices might threaten to seize your bank account or garnish your wages.
Filing for bankruptcy is one way to put an immediate stop to the IRS threats. As soon as you file your voluntary petition you will begin an ‘automatic stay.’ This means that IRS agents and creditors cannot send you letters requesting back taxes or debts. The automatic stay puts an immediate stop to all attempts at collecting the debt.
An automatic stop doesn’t only relate to the money in your accounts, it also extends to property. After you trigger an automatic stop it protects your money and property from creditors and forbids them from contacting you. Any creditor who violates an automatic stop will encounter serious repercussions.
Tax Debt Discharge
Tax debt along with other debts can be written off when you apply for bankruptcy, however, there are still certain criteria that must be adhered to for the courts to settle in your favor. Following your bankruptcy application, you will file your paperwork, meet with a trustee, and hopefully receive a discharge from the courts.
On the paperwork, you receive you will first have to list your debt as ‘priority unsecured.’ This is written in part one of the schedule E/F forms. You will then receive notice from a trustee who will have reviewed the paperwork and confirmed your identity. The trustee may have some further questions to ask.
Your case will then be heard by the courts who have the power to discharge both secured and unsecured debts. If your debts fall under the court’s requirements for discharge, you will be sent an official discharge notice within 60 days. In some cases, there will be criteria that may block a discharge, such as a student loan debt.
Can Tax Debt Be Erased?
Some rules determine whether your IRS debt can be discharged. These loans are outlined below.
Income Taxes; an automatic stop may prevent creditors from contacting you but when it comes to discharging debt, only IRS income tax will qualify. This, however, is loosely defined. Some taxes, such as 1040 taxes are income tax, check which of your taxes qualify.
To qualify for a discharge of IRS debt you must have filed returns for a period of two years prior to the filing of bankruptcy. If this two-year period is not satisfied it could present a barrier to your IRS discharge. Before you file for bankruptcy make sure you have at least two years of IRS tax files on record.
To have your tax debt erased it must also be over three years old. Some IRS lawyers have been known to object to a tax discharge based on one or two days, so double-check that your debts are officially over the three-year limit.
Special Rules for Student Loans
The courts will determine what debt is dischargeable. If all the criteria is satisfied there isn’t any reason why your IRS tax debt should be erased. However, these rules don’t apply to all types of debt. Student loan debt, for instance, is one exception. Unless you are able to prove special circumstances, this debt won’t be discharged.
Normally, an individual with student debt, who is also filing for bankruptcy, will have to prove ‘undue hardships for the student debt to be discharged. The status of ‘undue hardship’ can mean different things in different states since the Supreme Court is yet to rule on the issue.
If you find yourself in this position it’s worth consulting with a tax lawyer or legal consultant for advice about your particular situation and the laws in your state. It is more difficult to have student debt discharged but not impossible depending on your position.
What Happens If Tax Debt Can’t Be Erased?
If you are unable to have your tax debt erased you still have options to protect your finances, livelihood, and wellbeing. In many cases, individuals will contact the tax professionals at Anthem Tax Services and set up a payment plan or look into other tax debt relief services. These IRS payment plans allow you to pay back your debt in reasonable installments. When you have entered an installment agreement the agency steps back.
However, an IRS installment payment plan will only be applicable if the individual has enough money to pay back the debt. If this is not the case you may enter into the offer in compromise program. In the offer in compromise program, you will pay back some of the money and have some of it written off or forgiven.’ This can be a favorable alternative to bankruptcy.
If the tax you owe can’t be erased and the offer in compromise program is not an option either you might think about filing for bankruptcy. Many people do this if they receive threats from the IRS about their debt. It’s a worthwhile option, however, make sure your debts are eligible for discharge before you file for bankruptcy.
What About Tax Refunds?
If you are owed a tax refund from the IRS it might be advisable to wait on it before you file for bankruptcy. Talk to your lawyer regarding this issue. Usually, when an individual files for bankruptcy any non-exempt property will get transferred to the trustee, this includes tax refunds. However, policy differs on this around the country. Talk to your local attorney about it, in the end, you will have to make a decision based on your current circumstances and your best interests.
Tax Debt Relief Experts Working For you
If you find yourself in debt to the IRS, don’t panic. There are systems in place that are designed to help those that need assistance and time to pay their debt to the IRS. If you need assistance with your tax debt, you can read our tax debt relief overview of the plans that are available to you and get in touch with our team of tax professionals by phone (888.548.0478) or email.