Taxation & Estate Planning

It's a Little Known Fact that Bankruptcy Can Stop IRS Collection

By Darrin Mish

Most people fall on financial hard times, regardless of the reasons. The IRS may demand that you also settle your tax debt, increasing the money owed to creditors. The IRS can be quite unforgiving, unlike other bill collectors. They can effectively wreck a taxpayer's life if they want to continue specific collection methods. Filing for bankruptcy offers a degree of protection against the IRS's worst debt collection techniques.

Bankruptcy is not an easy way out of debts, contrary to popular belief. People can legally seek debt relief with this, and tax debts are included. It is likely to cancel all tax and other debts by filing for Chapter 7 bankruptcy, but without any guarantees. Filing for Chapter 11, 12, or 13 bankruptcy provides people an opportunity to settle their IRS issues by entering into a payment plan.

You receive an 'automatic stay' or legal protection when you file for bankruptcy. The IRS and all other creditors must stop all actions against you once you have filed for bankruptcy. Applying with the bankruptcy court is the only way that any of your creditors can hurdle the automatic stay while your bankruptcy is still in the process of being discharged or dismissed. Judges rarely lift the automatic stay, although the IRS is a government entity. Generally, in order for that to happen, the IRS is responsible for proving that fraud is being committed by the taxpayer who is filing for bankruptcy. You have more serious IRS issues on your hand if you're conducting fraud.

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

When specific requirements such as the three-year rule are met, tax debts are possibly cleared with a Chapter 7 bankruptcy claim. All tax debts considered are at least 3 years old, beginning from April 15 of the year they were filed, as stated in the three-year rule. Also included in the rule are extensions.

There's also the two-year rule which includes taxes filed 2 years prior to bankruptcy. Another rule is the 240-day rule, applied to taxes assessed 240 days before bankruptcy filing.

However, there are also significant loopholes that will still allow the IRS to collect the tax bill, even if a Chapter 7 bankruptcy is filed and discharged. The IRS has first rights to any property, if they filed a tax lien before the bankruptcy was filed. The main benefit of Chapter 11, 12, and 13 bankruptcies, as re-organization bankruptcies, is to enable taxpayers to buy time to settle their IRS problem.

Darrin T. Mish is a veteran, nationally recognized tax attorney who has focused on providing IRS help to taxpayers for over a decade. He regularly travels the country training other attorneys, CPAs and enrolled agents on how to handle their toughest cases with the IRS. He is highly ranked among the top attorneys in the country, with an AV rating from Martindale-Hubbell and a perfect 10 on Avvo.com. Martindale-Hubbell has also honored him with a listing in their Bar Register of Preeminent Lawyers. He is a member of the American Society of IRS Problem Solvers and the Tax Freedom Institute. With clients on every continent but Antarctica, he has what it takes to solve your IRS problems no matter where you live in the world. If you would like more information about his practice and how he can help you, please call his office at (813) 229-7100 or toll free at 1-888-GET-MISH.

Full post as published by IRS Problem Solver Blog on August 17, 2009 (boomark / email).