An Overview of the IRS Tax Collections Process for Non-Tax Lawyers
26. Taxes and Bankruptcy
Taxes and bankruptcy. Bankruptcy is what we consider a nuclear option. It is a very extreme measure. It can be a very effective tool if the taxpayer has other debts. But it has a lasting impact on the taxpayer and on their credit and on the perception of their general financial competency.
We generally recommend bankruptcy as a last resort particularly if the taxpayer only has tax liability which is perhaps best settled in the Offer in Compromise program versus going and filing a Chapter Seven.
However, bankruptcy can be an effective tool where there are other debts or where an Offer in Compromise might not be the most feasible route to go for a variety of circumstances. Obviously this is based on the individual and the variety of circumstances that surround most people which were all different.
But in terms of bankruptcy, we are dealing with liabilities that are income taxes. There cannot be any indicator of fraud or tax evasion. We are dealing with tax that are at least three years old. That’s really important. A lot of people file return assuming they can be out of debt right away.
Your tax debt that has to be at least three years old and it has to be tax that the IRS has had at least 240 days to collect on you. That’s really important because when considering new liabilities especially tax payment issue made over multiple years when they just file a year, when starting that clock on when you can file for bankruptcy it is really important to make sure that the Statute of Limitations has properly expired. So you’re going to want to account for tolling and you’re going to want to account for a variety of factors to make sure that your client is eligible to bankrupt those tax liabilities.
If you fail to properly account for those and file bankruptcy before the Statute has properly expired then those taxes are not just chargeable for bankruptcy. It’s a really, really important consideration. There are some very critical malpractices usually advising the client to file for bankruptcy and not having all their tax liabilities absolved.