Although the intersection of the United States bankruptcy code, the internal revenue code, an IRS lien and levy rights is complicated, bankruptcy relief is often the best option for solving serious tax issues.
The filing of a bankruptcy case immediately stops IRS bank account levies and wage garnishments. It also enables the taxpayer to either obtain a discharge or reorganize their tax liabilities.
Income Tax Discharge Guidelines
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) essentially merged the tax discharge rules applicable to Chapter 7, Chapter 11 and Chapter 13 bankruptcies. These rules are complex and their specific application to a taxpayer depends on the individual facts and circumstances of a case. Generally speaking, most “old” taxes can be discharged or eliminated, while “new” tax liabilities are treated as “priority taxes” and are nondischargeable.
The ability to discharge a tax in bankruptcy, and the selection of the proper bankruptcy chapter, is primarily determined by three dates:
- The last date on which the taxpayer’s return was due for the year of the delinquent tax
- The date the taxpayer actually filed the applicable return
- The date the tax in question was assessed by the IRS
The proximity of the previous dates in relation to the taxpayer’s bankruptcy case filing date may also be important. Generally, the bankruptcy code allows an individual to discharge an income tax if all of the following requirements are met:
- The tax return was filed more than two years before the bankruptcy filing (the “Two-Year Filing Rule”)
- The tax return was due more than three years before the bankruptcy filing (the “Three-Year Look Back Rule”)
- The tax liability was assessed more than 240 days before the bankruptcy filing (the “240-Day Assessment Rule”)
- The taxpayer did not file a fraudulent tax return or engage in tax fraud or evasion
Unfortunately, calculation of the above is not simple and often requires experience in reviewing and interpreting IRS tax transcripts. Additionally, the running of these time periods can be extended (or reduced) by many different events. For example, a prior bankruptcy “tolls” — or stops — the running of the two-year filing and three-year look back time periods; an “Offer in Compromise” will toll the running of the 240-day period.
In plain language, the bankruptcy discharge of a personal income tax liability is primarily governed by the lapse of different time periods from the tax return due date, the actual return filing date and the tax assessment date — all to the date of a taxpayer’s bankruptcy filing date. These periods can be thought of as separate statutes of limitation periods that expire over different time frames. Once all of these time periods have expired, a tax liability will change from a nondischargeable “priority tax” into a “nonpriority tax” that in most cases will be dischargeable in a bankruptcy case.
The Effect Of Tax Liens And Encumbrances
The availability and benefits of a bankruptcy discharge of income tax liabilities may also be impacted by the existence of a filed “Notice of Federal Tax Lien” encumbering the taxpayer’s property. A filed federal tax lien attaches to all of the taxpayer’s real and personal property, and must be taken into account in any bankruptcy filing or other delinquent tax solution considered by the taxpayer or the taxpayer’s legal counsel. The interplay of delinquent federal tax liabilities, a filed tax lien and bankruptcy has always been one of the most complex areas of law. Recently it has been further complicated by provisions contained in the BAPAC act of 2005. If you have had a federal tax lien filed against you, it is imperative that you seek knowledgeable tax and legal counsel.
Get Solutions For Your Tax Problems
If you’re considering bankruptcy as a possible solution to your tax problems, don’t go it alone. Contact Daniel Rosefelt & Associates, LLC, Attorney & CPA at (301) 656-4424 or reach out by completing our ten-second consultation form.