If You are Bankrupt, The IRS Cannot Collect

Many people fall on financial hard times, no matter the causes. The IRS may think that they also need to be paid for tax debts, increasing the money owed to creditors. The IRS can be quite ruthless, unlike other bill collectors. If the IRS wants to continue certain collection methods, they could wreck a taxpayer’s life effectively. What most people do not know is that filing for bankruptcy may allow them a degree of protection from most of the worst tactics employed by the IRS in their debt collection practices.

Bankruptcy is usually misconstrued by taxpayers. It’s viewed as an easy way to escape from debts. Bankruptcy isn’t an easy escape. Bankruptcy lets people look 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. This can occur, but there’s of course no guarantee that your tax debt will be considered. Anyone filing a Chapter 11, 12, or 13 bankruptcy has the chance to solve their IRS problem via an installment option.

When you file for bankruptcy, you get legal protection which is typically known as the ‘automatic stay’. Once you’ve filed for bankruptcy, all of your creditors, including the IRS, must stop all actions against you. Applying to 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, even though the IRS is a government entity. Often, in order for that to happen, the IRS is liable for proving that some 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 prolonged when you file for bankruptcy. In essence, the ‘clock’ freezes until the bankruptcy is either discharged or dismissed. The clock goes on from that point forward if it’s dismissed.

When specific requirements like the 3-year rule are satisfied, tax debts are potentially effectively cleared with a Chapter 7 bankruptcy claim. The 3-year rule essentially states that all tax debts considered are no less than three years old from April 15 of the year it was filed. Extensions are also included.

There is also the 2-year rule which includes taxes filed 2 years prior to 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. The IRS has first rights to any property if they recorded a tax lien before the bankruptcy was filed. The main benefit of Chapter 11, 12, and 13 bankruptcies being re-organization bankruptcies is to allow the taxpayer to buy time to settle their IRS issue.

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