Bankruptcy Impact on Money Owed to the IRS

Written by James Hirby and Fact Checked by The Law Dictionary Staff  

The IRS itself, in IRS Publication 908 (P908), states that bankruptcy has no impact on monies owed the IRS prior to the bankruptcy filing.  However, after filing, depending on what type of filing the debtor made the rules on the continuing penalties and interest changes some.  P908 is the IRS explanation and expectations of the taxed debtor who files for bankruptcy.  It explains that the bankruptcy trustee manages the estate set up as a part of the bankruptcy.  It explains that the bankruptcy estate is its own taxable entity while the actions of the bankruptcy go on.  It explains that there is no recognizable estate when the estate becomes a “no assets” estate because there are no assets or all of the assets have no value due to federal bankruptcy law (FBL) or state bankruptcy law (SBL) allowed exemptions.  Many people, but few experts, see bankruptcy Chapter 7 as a big help even though it does nothing but exclude IRS owed monies.  The experienced people were better able to pay, and pay off more quickly on their IRS debts due to the lessening of the other debts owned when the Chapter 7 discharge finally occurred.  Chapter 13 is less of an overall help as it will include the IRS owed debt as part of the debt list that the debtor must pay over the three to five years stated in the bankruptcy ruling.  What comes as an assist is that any penalty and interest is stopped at the filing and the remaining debt wiped out.  Many people and many experts as well wrote about the conditions that allow IRS taxes and some state income taxes to be subject to discharge.  For instance in Chapter 7 the debtor has to have filed and owed IRS taxes at least three years in the past.  File for bankruptcy one day early and the bankruptcy courts will not allow these specific IRS taxes to be discharged. But there is an “and” to this.  The debtor had to have also filed two years in the past and another “and” is to have had taxes assessed by the IRS at least 240 days prior to filing.  Missing this set of criteria but getting Chapter 7 means that the IRS will have another six years at the debtor before the debtor can re-file for Chapter 7 again.  The IRS loves penalties and interest.  So, if the debtor files on a correct timeline there is the opportunity for the debtor to shake off the IRS debt at discharge.

Chapter 13 is a help two ways.  A person can file for Chapter 13 immediately after the discharge, or dismissal, or a Chapter 7.  Experts humorously (?) call this a “Chapter 20” (7 + 13).  The same goes for filing Chapter 13 again after the discharge of a previous Chapter 13.  Experts call this a “Chapter 26”.   Chapter 13, as in any bankruptcy filing, stops the penalties and interest and gives the debtor the opportunity to catch up on his or her debt.  Back to back filings also help on this.

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