How IRS Collections Can Be Ceased By Bankruptcy

Numerous people can have financial issues and owe money. Among creditors, the IRS is the most ruthless and use particular tactics to collect tax debts. You can get the IRS off your case with the protection made available by a bankruptcy claim.

Taxpayers usually misconstrue bankruptcy. It's seen as an easy method to get out of debts. Bankruptcy is not a simple escape. Bankruptcy was first designed as a way that allows people to look for legal debt relief, and that includes tax debt relief. When you file for a Chapter 7 bankruptcy, there's a considerable chance that, along with all of your regular debts, your tax debt will also be cancelled. There is no guarantee that tax debt will be considered, but this can occur. Anybody filing a Chapter 11, 12, or 13 bankruptcy has the ability to solve their IRS issue through a payment deal.

Filing for bankruptcy legally protects you from all actions made by the IRS and other creditors against you with an 'automatic stay'. Creditors appealing to the bankruptcy court is the sole way for the automatic stay to be lifted. However, this happens very rarely. Creditors like the IRS have to prove fraud in the bankruptcy claim for an automatic stay to be lifted. A more serious IRS problem is likely if fraud is uncovered.

Tax debts are merely frozen until the bankruptcy claim is dismissed or discharged. The statute of limitations resumes when bankruptcy is dismissed, effectively lengthening it.

When specific conditions such as the 3-year rule are satisfied, tax debts are potentially effectively cancelled with a Chapter 7 bankruptcy claim. The three-year rule essentially states that all tax debts considered are no less than three years old from April 15 of the year it was filed. Extensions are also included.

The second rule is appropriately called the two-year rule. Two years prior to the bankruptcy is when the tax return should have been filed. There's also a rule called the 240-day rule. The IRS must assess the taxes no less than 240 days prior to filing for bankruptcy in this one.

However, there are also important loopholes that will still allow the IRS to collect the tax bill, even if a Chapter 7 bankruptcy is filed and discharged. If the IRS filed a tax lien before the bankruptcy was filed, then, even after filing, the IRS still has first right to any property that the taxpayer owned at the time of filing for bankruptcy. The main benefit of Chapter 11, 12, and 13 bankruptcies being re-organization bankruptcies is to allow the taxpayer to buy time to settle their IRS issue.

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