Dear Bankruptcy Adviser,
How much of an Internal
Revenue Service past debt can or will be cleared when declaring Chapter 7 bankruptcy?
It is possible to eliminate all delinquent
taxes in a Chapter 7 bankruptcy. In general, there is a multiple-step test to
determine whether tax debt can be eliminated. First, you should order tax transcripts
directly from the IRS. Depending on your tax situation, you might want to order
transcripts for the past 10 years.
More importantly, Joe,
you cannot be afraid of the IRS. I know most people consider the IRS to be like
any other debt collector. This could not be further from the truth. In my experience,
the IRS is easy to work with. Whether it is because they do not have the same
pressures as debt collectors or whether the government simply hires more patient
people, I don't know. But the IRS is the only debt collector that does not get
angry when told "I cannot pay right now."
Unlike a debt collector
who will try to corner you into a position and demand payment so that your delinquent
account can be resolved, the IRS is not going anywhere. Instead, the agent simply
wants to know what is going on. Communication is the key to working with the IRS.
Hiding from the IRS is counterproductive and usually will result in more problems.
Here are the significant parts of the step-by-step analysis
attorneys use before advising a client about the status of delinquent taxes. Please
note that there are exceptions to each of the following points:
Filed tax returns: You must have filed all tax returns.
You may have requested an extension for filing; this could affect your ability
to eliminate the delinquent taxes.
are at least three years old: The taxes you include in the petition must
be at least three years old. For example, if you filed your tax returns on time
and still owe taxes from 2003, then it is possible that these taxes can be eliminated.
No IRS assessment in the past 240 days:
This is a very important part in determining whether the delinquent taxes are
dischargeable. As you can imagine, the IRS does not just sit back hoping you'll
pay. Unfortunately, there are too many issues to discuss in this column regarding
tax assessment and the categorization of the taxes. But at a minimum, you can
review the tax transcripts to determine whether the IRS has assessed your tax
returns in the last 240 days.
not try to evade the IRS: This issue must be considered on a case-by-case
basis. Even though you can pass the other three tests, the IRS could challenge
your bankruptcy. The above tests do not apply if the IRS believes that you have
tried to avoid paying taxes and can prove that you had money available to pay.
For example, I heard a story from the IRS in which a debtor
owed delinquent taxes and earned a good income. However, the debtor decided to
deposit all his paychecks into his girlfriend's checking account in order to show
that he personally had no income. The IRS discovered this fact and challenged
his bankruptcy on the grounds that he was intentionally evading his obligations.
The IRS won. As a result, the debtor now has a bankruptcy on his record and thousands
in tax debt that must be paid back, with interest and penalties.
Additionally, I once was hired by a debtor who filed a bankruptcy five days too
early and could not eliminate a significant amount of IRS debt. As a result, the
debtor was forced into a Chapter 13 bankruptcy rather than eliminating all his
delinquent taxes. Had an attorney reviewed the transcripts prior to filing, these
taxes may have been eliminated.
You do not need a bankruptcy
attorney to determine whether your IRS taxes are dischargeable. However, an attorney
would let you know whether it is likely that the taxes can be eliminated. Even
if you do not hire one to file your bankruptcy, it may be worth the cost to have
an attorney review your tax transcripts.