Dealing With The Man: The IRS And Bankruptcy

by Hermin Dowe on November 10, 2014

When a debtor files for bankruptcy, the last thing they want to deal with is the Internal Revenue Service (IRS). However, it has become increasingly common in recent years to file for Chapter 7 or 13 due (at least in part) to high tax bills. It is imperative going in that you be aware of what you can and cannot discharge, and what specific protocols you must follow.

Dischargeable Tax Debts

Some tax debts are indeed dischargeable, mostly those that are income-tax related. Section 11 USC §§ 523(a)(1) and 507(a)(8) of the Bankruptcy Code lay out the criteria that must be met. They are:

  • More than three years must have passed since the tax return that created the debt was due.
  • That tax return must have been filed two years or more before the bankruptcy petition. If you had delinquent returns and just now filed them, you must wait if you want the debt to be potentially dischargeable. Also, they must be returns, not any of the forms that normally substitute for returns; those are not acceptable proof under the Bankruptcy Code.
  • At least 240 days must have passed since any kind of IRS review of your file - audits or amendments to your return, or an offer in compromise
  • No fraud or evasion of any kind.

Be advised that while tax debts (if they meet the requirements) are usually dischargeable, tax liens are not, if they were put on the property before your filing.

Taxes After A Bankruptcy Filing

It might seem daunting to file a tax return after you have gone through a Chapter 7 or 13, especially if you are still in proceedings. However, it still must be done, and for most filers, it is surprisingly simple.

The crux of the matter for a Chapter 7 filer is that essentially, you can file your 1040 as you normally would - paying taxes is not a debt, per se; it is an obligation to the government, so the trustee does not need to be involved. However, your trustee will also file a tax form for you, called a 1041, and they will do so as the administrator of your bankruptcy estate. The trustee’s job is to help your creditors be paid with any available assets that you have, and there must be a record of their dealings, both for your records and in case any misconduct has occurred.

With a Chapter 13 filing, however, the procedure is slightly different. In Chapter 13 proceedings, you are essentially on a government-helmed payment plan to eliminate your debts. As such, all you need do is to file taxes in a timely manner, and then inform the trustee of the contents of the filing, so as to keep their records in order.

Contact A Bankruptcy Attorney

If you need help balancing the IRS and your other obligations, we may be able to provide it. The experts at the Dowe Law Firm stay up to date on the best information to get our clients what they need and deserve. Call us today for a free consultation - we serve Contra Costa, Solano and Alameda County.

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