IRS DEBT - BANKRUPTCY DISCHARGE ANALYSIS
OVERVIEW AND FAQ
OVERVIEW - BANKRUPTCY DISCHARGE ANALYSIS - IRS DEBT
Using bankruptcy law to resolve IRS debt…when it makes the most sense.
A “tax motivated” bankruptcy is one where the primary debt is tax debt, penalty and interest, or at least the primary reason for using bankruptcy as a solution, is tax debt. The tax debt can be any type of tax - income, sales, payroll, employment, or excise taxes. Our Tax Bankruptcy attorneys analyze every tax claim and examine its attributes to strategically eliminate or reduce them along with all other debt.
Bankruptcy can be a powerful way to eliminate qualifying IRS tax debts and other unsecured debts. providing significant relief for eligible individuals. However, its success depends on meeting stringent criteria for tax debt dischargeability and understanding the impact of tax liens or non-dischargeable taxes. Consulting a bankruptcy attorney is critical to navigate these complexities, assess eligibility, and maximize protections under exemption laws. For further details, resources like the IRS website (irs.gov) or legal aid services can provide guidance.
Our client’s hire us to ensure that they eliminate or otherwise reduce their tax claims to the greatest extent possible.
We Do What Matters Most
Focus on eliminating tax debt in bankruptcy – plain and simple. When it comes to eliminating tax claims in bankruptcy, there are complex statutory hurdles and judicial rules to navigate. We live and breathe tax-bankruptcy law and strategically plan each bankruptcy case to effectively resolve the tax debt. While most other bankruptcy law firms focus on bankruptcy and deal with the tax claims as an after-thought, we don’t.
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FAQ - BANKRUPTCY DISCHARGE ANALYSIS IRS DEBT
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Yes—a chance if it’s income tax, the timing works and you “meet” some other criteria. Bankruptcy discharge zeroes out large/old IRS balances routinely for people with the right situation. The primary questions are whether your specific years qualify and how you fit into the bankruptcy framework generally.
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Three mechanical timing rules must all be satisfied for each tax year:
The return was due (April 15 + any extension) at least 3 full years before the bankruptcy filing date
You (or your accountant) filed a “qualifying” Form 1040 at least 2 full years before filing
The IRS assessed the tax at least 240 days before filing (or never assessed it)
No fraud/willful evasion, no payroll/trust-fund taxes, timing periods have moved past any “tolling” events, and assuming the bankruptcy makes sense otherwise ….
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Not usually in Arizona.. Since 2010, the IRS has taken the position that a late-filed 1040 is a valid return for discharge purposes if filed more than 2 years before bankuptcy and before the IRS assesses debt based on a substitute return. Thousands of people with late returns have walked away owing $0 as result…but this IRS position could change in the future.
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The IRS is almost assuredly going to treat the debt as non-discharged in this scenario post bankruptcy forcing you to open a seperate litigated case about what constitutes a “return” in bankruptcy. BEST best is to file returns before the IRS assesses based on it’s substitute return to ensure bankruptcy may be an option to deal with the debt down the road.
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No. Bankruptcy can end your personal obligation to pay the debt., but the lien only attaches to property you own on the filing date. Everything you earn, inherit, or buy afterward is protected from being collected on in relation to that discharged debt. Once the underlying tax is discharged, the IRS releases those liens often after a request. Sometimes the IRS won’t release the lien however just because you asked and will try to collect against the asset or make the release conditional on paying some agreed upon amount. OR sometimes bankruptcy filers in this situation will wait out the 10 year collection statute period in hopes the IRS won’t try to collect on the lien value - allowing the lien to be released on that date.
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As a general rule chapter 7 is better overall for most people. However, there are situations where chapter 13 must be used or does at least make more sense than a 7. Once a situation is fully reviewed an experienced attorney can explain the pros and cons of each in a way that will make it easier to decide which route is better.
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Official IRS history documents along with your own proof documents tell the story about whether irs debt can be treated as dischargeable in bankruptcy.
An experienced attorney can retrieve them, line up the calendar, ask you questions, look at other documents and tell you what is likely to happen. -
Yes. Clients sometimes hire me to review just the date history of the IRS debt to determine if the date requirements have been met and if not when they will be.