As a former attorney and IRS Enrolled Agent I see a lot of mistakes made when taxpayers file bankruptcy to eliminate tax debt. I have also seen a lot of attorneys make matters worse. The first thing you need to understand is in order to discharge IRS debt the date the return was due must be at least three years ago. For example, the 2017 tax return needed to be filed in April of 2018 and three years from that is April of 2021. So, today you could not discharge 2017, 2018, or 2019 tax debt. Further, the return must have been filed at least two years ago regardless of when it was due. For example you did not file 2012 and you want to discharge it. You have to file and wait two years.
Additionally, you need to be aware that the Bankruptcy law changed significantly in 2005. You cannot just file a Chapter 7 liquidation and discharge all your debt. The bankruptcy court must now run the ‘means test’. Essentially, if you have extra money you will have to make payments on all your debt. You may pay less, but you still must pay something. Filing bankruptcy “stays” the statute of limitations for collecting the tax.
If you must file bankruptcy for other debt then you have no choice, but if you are just trying to settle tax debt beware it may not be your best option, and you may come out of bankruptcy still owing IRS.
- Bankruptcy results in an immediate release of an IRS levy, no questions asked.
- Filing for bankruptcy causes what is known as an “automatic stay” on collection actions by all creditors, including the IRS. The stay is imposed by the bankruptcy code and requires that creditors (including the IRS) not only release levies and garnishments but also stop lawsuits as well.
- An IRS revenue officer or ACS employee should release a levy immediately upon being provided with the bankruptcy case number.
- As the release is a matter of law, no financial statements are required. There is no need for disclosures or negotiations with the IRS.
- Another advantage in using bankruptcy to release a levy is that the IRS is required to release it even if there are unfiled returns (although the returns will need to be filed for bankruptcy purposes).
- The bankruptcy stay also prevents the IRS from filing a federal tax lien if one has not yet been filed.
- The relief provided by bankruptcy usually continues while the bankruptcy is pending, preventing the IRS from issuing future levies and tax liens.
- In most cases, the stay on future levies continues until the bankruptcy case is closed, the bankruptcy is dismissed, or a final discharge of debt is granted or denied.
- In Chapter 7 bankruptcy filings, the stay on the IRS should last between four to six months.
- Chapter 7 is known as a liquidating bankruptcy.