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Bankruptcy and IRS Liabilities
The issue often arises whether a taxpayer can get rid of their back tax liability through bankruptcy. The issue then becomes whether Internal Revenue Service (IRS) taxes are a type of “debt” that can be discharged in bankruptcy. If you are considering filing bankruptcy you should speak with a bankruptcy attorney regarding whether your IRS debt is dischargable. There are a number of factors that must be considered before taxes can be discharged in bankruptcy. As in all bankruptcy proceedings, there needs to be a determination that the taxpayer qualifies for bankruptcy. If the bankruptcy was properly filed, then there needs to be an examination as to the type of taxes and the age and filing of the tax years. Generally, recent federal income taxes cannot be discharged in bankruptcy. Additionally, business-related payroll taxes generally cannot be discharged in bankruptcy.
In regards to Federal Tax Liens, if a taxpayer qualifies to discharge some or all of their taxes in bankruptcy, a prior recorded tax lien should remain in place. Bankruptcy will only eliminate a taxpayer’s personal obligation to pay the debt and not the IRS’ right to collect or seize any property owned at the time of bankruptcy. For example, in some cases a taxpayer may have a certain amount of equity in “exempt property” such as in real estate, vehicles or a pension that does not have to be surrendered to creditors for purposes of bankruptcy. However, outside of bankruptcy the IRS may still have the right to collect against these assets.
Before a taxpayer files bankruptcy, they should take into consideration the impact that bankruptcy will have on them. Although bankruptcy has become more common place among Americans, there is still a negative connotation associated with bankruptcy and a degree of personal shame. Moreover, bankruptcy is listed on an individual’s credit report as negative information.
As an alternative to bankruptcy when dealing with federal taxes, a taxpayer should consider establishing an Installment Agreement, having their account placed on a Currently Not Collectible Status or filing an Offer in Compromise. Unlike bankruptcy, an Offer in Compromise will discharge a federal tax lien and is not reported on an individual’s credit report. Further, unlike bankruptcy, there is not an age requirement for the taxes when filing an Offer in Compromise and payroll taxes can be included.
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Source: RoniDeutch.com
