The IRS Cannot Collect If You are Bankrupt!

Many people owe money because of problems financially. To collect tax debts, the IRS uses certain tactics, making it the most unforgiving of creditors. You can get the IRS off your case with the protection offered by a bankruptcy claim.

Bankruptcy is usually misunderstood by taxpayers. It's viewed as an easy method to get out of debts. Bankruptcy is not a simple escape. Bankruptcy lets people search for relief from debt legally, including tax debt. There is a considerable chance that your tax debts, along with your regular debts, can be erased if you file for Chapter 7 bankruptcy. There is no guarantee that tax debt will be included, but this can occur. Anybody filing a Chapter 11, 12, or 13 bankruptcy has the chance to solve their IRS issue through an installment option.

Filing for bankruptcy legally protects you from all actions from the IRS and other creditors against you with an 'automatic stay'. The only way for the automatic stay to be lifted is when creditors apply to the bankruptcy court. However, this occurs quite rarely. For an automatic stay to be lifted, the IRS and other creditors should be able to give evidence of fraud in the bankruptcy claim. A more serious IRS issue is likely if fraud is found.

However, one of the negative factors of filing for bankruptcy is that it definitely prolongs the statute of limitations on any tax debt. Basically, the 'clock' stops until the bankruptcy is either discharged or dismissed. The clock continues from that point forward if it's dismissed.

Filing a Chapter 7 bankruptcy is the only form of bankruptcy that will effectively clear any tax debts. For tax debts to be eligible for discharge in a Chapter 7 bankruptcy claim, certain conditions should be accomplished. During the bankruptcy proceeding, the three-year rule have to be satisfied, for instance. The three-year rule says that any tax debts must come from a tax return that was filed no less than three years before the year you file for bankruptcy. This includes extensions, although usually pertaining to April 15 of the year the return was filed.

There's also the 2-year rule which includes taxes filed two years prior to bankruptcy. Taxes assessed 240 days prior to filing the bankruptcy claim is applicable in the 240-day rule.

But there are also significant loopholes that will still enable 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 recorded a tax lien before the bankruptcy was filed. The main advantage of Chapter 11, 12, and 13 bankruptcies being re-organization bankruptcies is to allow the taxpayer to buy time to settle their IRS issue.