Understanding Tax Discharge Through Chapter 7 Bankruptcy
If you’ve thought about wiping out your tax debt, then, you will want to read this:
Filing Chapter 7 bankruptcy on IRS income tax is absolutely legal, viable, and available to you. Just remember the 3/2 rule:
If you have filed an income tax return over 2 years ago and it is for a tax year over 3 years ago, then, you can file a Chapter 7 bankruptcy and liquidate the tax debt.
However, you will want to make sure that the last date of assessment also meets these requirements.
What Does This Mean?
Here are some examples to make this clearer:
Example 1: Mr. Tim Horton
Tim owes $80,000.00 in IRS income tax debt from the years 2011, 2012, and 2013. If today is January 1, 2018, then, he can file for bankruptcy and liquidate all of the debt.
Example 2: Duncan Donits
Duncan owes $80,000.00 in IRS income tax debt from the years 2011, 2012, and 2013. However, he did not file any of these tax returns until just yesterday. If today is January 1, 2018, he needs to wait 3 years to file Chapter 7 bankruptcy.
Example 3: Brian Starbukz
Brian owes $80,000.00 in IRS income tax debt from 2011, 2012, and 2013. However, he went under audit in 2017, and it turns out that his 2013 income tax return resulted in an additional $40,000.00 worth of tax debt. Since his last date of assessment is still inside of the 3-year look-back period, his 2013 tax debt does not qualify for Chapter 7 bankruptcy relief.
Additional Considerations Before Filing
Filing bankruptcy comes with many additional layers of complexity. First off, all of your debt comes into play. This includes:
- Credit cards (even your Macy’s card will be closed out)
- Utility accounts, which may require a deposit of hundreds of dollars before continuing service
This is no easy task for the debtor.
Consider Alternatives
Before proceeding with bankruptcy, consider other options such as an Offer-In-Compromise, and take time to understand both the positive and negative consequences of each choice.
Frequently Asked Questions
Can IRS tax debt be discharged through Chapter 7 bankruptcy?
Yes, IRS income tax debt can be discharged under Chapter 7 bankruptcy, but only if it meets specific criteria under the 3/2 rule: the tax return must have been filed at least 2 years ago, the tax year must be at least 3 years old, and the most recent IRS assessment must also be at least 240 days old.
What is the 3/2 rule in Chapter 7 bankruptcy?
The 3/2 rule refers to two timing conditions: (1) the tax return must have been filed more than 2 years ago, and (2) the tax debt must be for a year that ended more than 3 years ago. Both must be true for the tax debt to be eligible for discharge under Chapter 7.
Does an IRS audit affect Chapter 7 discharge eligibility?
Yes, it can. If a tax debt is reassessed during an audit within the last 240 days, it resets the discharge eligibility clock. So even if the original debt was from a qualifying year, recent audit assessments may make it ineligible for Chapter 7 relief.
Will filing Chapter 7 affect my other debts?
Absolutely. All debts are considered in Chapter 7, including credit cards and utility accounts. Some services may require a deposit for continued access, and credit cards will be canceled, regardless of their balance or usage.
Are there alternatives to filing Chapter 7 bankruptcy?
Yes. Alternatives include an Offer-in-Compromise with the IRS or setting up a payment plan. These options can provide relief without the long-term consequences of bankruptcy and may be more appropriate depending on your financial situation.