If You're Bankrupt, The IRS Cannot Collect

Most people fall on financial hard times, regardless of the causes. The IRS may feel that they also have to be settled for tax debts, increasing the amount owed to creditors. And unlike other bill collectors, the IRS can be very ruthless in their efforts. If the IRS decides to pursue certain collection methods, they could wreck a taxpayer's life definitely. What most people don't know is that filing for bankruptcy may enable them a degree of protection from some of the worst tactics employed by the IRS in their debt collection practices.

Bankruptcy is usually misconstrued by taxpayers. It is viewed as a simple way to escape from debts. Bankruptcy isn't a simple escape. Bankruptcy lets people look for relief from debt legally, including tax debt. There's a significant chance that your tax debts, along with your regular debts, can be erased if you file for Chapter 7 bankruptcy. This can happen, but there's of course no guarantee that your tax debt will be considered. For anybody filing a Chapter 11, 12, or 13 bankruptcy, they will be provided the opportunity to move the IRS into settling for an installment deal and solve their IRS issue.

You get an 'automatic stay' or legal protection when you file for bankruptcy. As soon as you have filed for bankruptcy, all of your creditors, including the IRS, should cease all actions against you. The sole way collectors can bypass the stay while your bankruptcy is still being dismissed or discharged is to appeal to the bankruptcy court. Judges rarely lift the automatic stay, although the IRS is a government office. Typically, in order for that to happen, the IRS is liable for proving that a form of fraud is being conducted by the taxpayer who's filing for bankruptcy. You have more serious IRS problems on your hand if you're conducting fraud.

The statute of limitations is effectively lengthened when you file for bankruptcy. Until the bankruptcy is dismissed or discharged, the 'clock' stop. The clock ticks on from that point forward if it's dismissed.

The sole form of bankruptcy that will erase any tax debts effectively is the Chapter 7 bankruptcy. There are specific conditions and requirements that have to be met in order for tax debts to be eligible to being discharged in a Chapter 7 bankruptcy. During the bankruptcy proceeding, the three-year rule should be met, for example. A tax return filed at least 3 years before filing for bankruptcy is the basis for tax debts in the three-year rule. Generally, this points to April 15 of the year that the return was really filed, but it also includes extensions.

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

However, even if a Chapter 7 bankruptcy is filed, loopholes still enable the IRS to collect. 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 held at the time of filing for bankruptcy. The other forms of bankruptcy, Chapter 11, 12 and 13, are normally re-organization bankruptcies, and their primary advantage is to buy time to pay a tax debt and solve their IRS issue.

Darrin T. Mish is a Nationally recognized Attorney whose practice focuses on representing clients across the United States with IRS Problems. He is AV rated by Martindale-Hubbel and is a member of the American Society of IRS Problem Solvers and the Tax Freedom Institute. He has been honored by a listing in Martindale-Hubbel's Bar Register of Preeminent Lawyers. His passion is providing IRS help to taxpayers with both individual and payroll tax problems. He teaches attorneys, CPAs and Enrolled Agents in the finer aspects of IRS representation all around the United States. He can be reached at his website at http://www.getIRShelp.com