Legally reviewed by Allen A. Kolber, Esq. - The Law Offices of Allen A. Kolber, Esq., P.C.
Key Takeaways
- Income tax debt can be discharged, but only if it clears the three-year, two-year, and 240-day tests.
- Those clocks pause during a prior bankruptcy, an offer in compromise, or a collection appeal.
- A return the IRS filed for you does not start the two-year clock at all.
- A recorded lien survives discharge, but only against property you already owned.
There is no escaping your legal obligation to pay your taxes. You may want nothing more than to fulfill this responsibility as an upstanding United States citizen. But understandably, you may be so overwhelmed with all the other debts that you put your tax debts on the back burner, so to speak. This is what may have driven you to declare bankruptcy in the first place. Follow along to find out whether a bankruptcy filing can clear tax debt and how a proficient Rockland County bankruptcy attorney at The Law Offices of Allen A. Kolber, Esq. can help you find the financial relief you are looking for.
Can a Bankruptcy Filing Eliminate My Tax Debt?
The short answer is that, yes, tax debt may only be cleared through your bankruptcy filing if it meets certain criteria. Such criteria read as follows:
- The tax debt may be specifically federal and/or state income tax debt.
- The tax debt must not be from willfully evading paying your taxes or filing a fraudulent return.
- The tax debt must have been due at least three years before your bankruptcy filing date.
- The tax debt must have an associated tax return filed at least two years before your bankruptcy filing date.
- The tax debt must have been assessed by the Internal Revenue Service (IRS) at least 240 days before your bankruptcy filing date.
Those Three Clocks Can Stop Running
Unfortunately, the time periods above are often miscalculated, as several issues may suspend them, and the time will get added back on at the end.
- A previous bankruptcy case. The clock stops while the earlier case held the IRS off, and 90 days are added afterward
- An offer in compromise. The 240-day period is suspended while the offer is pending, plus another 30 days
- A collection due process hearing or appeal. The periods are suspended for as long as the IRS was barred from collecting, plus 90 days
So a taxpayer who submitted an offer in compromise two years ago, or who filed a case that was later dismissed, may be nowhere near the three-year mark they believe they have reached. Ultimately, it is worth having this calculation done properly, rather than assuming or estimating.
If the IRS Filed the Return for You, It Does Not Count
Where you never filed, and the IRS prepared a substitute return on your behalf, that document is not treated as a return for discharge purposes. The two-year clock never starts, and the tax generally stays with you no matter how old it becomes. Filing a late return yourself, even years late, at least starts the clock running.
Can Bankruptcy Clear a Tax Lien?
You must understand that tax debt is different from a tax lien. To reiterate, tax debt is specifically the money you owe to the IRS and/or New York State. So, in your bankruptcy filing, the automatic stay prohibits the IRS or state authorities from pursuing further collection efforts for your owed money, including wage garnishment. Then, the court may eliminate your financial responsibility to pay it off altogether.
On the other hand, a tax lien is a legal judgment against your property to satisfy a due tax obligation. In other words, this involves a creditor placing a claim against your property to give themself the authority to sell it if you cannot and do not pay them back. Unfortunately, in your bankruptcy filing, the court may not lift any prior tax liens against your property. This is because once an IRS or state tax lien is filed and recorded, it becomes a secured financial obligation in your bankruptcy proceedings. Meaning that if you wish to sell your property in the future, you must pay off its tax lien first.
A Surviving Lien Does Not Follow You Forever
A recorded lien attaches to what you owned at the time of your filing, and it will remain attached to the property. It does not impact things purchased after filing. As such, a discharge can be incredibly beneficial, even when a lien survives:
- Your personal liability ends
- The IRS cannot pursue your future wages or property purchased
- What remains is a claim against specific property you already had.
Filing Before a Lien Is Recorded Differs from Filing After
The order of events will ultimately determine the outcome. Once filed, the IRS is prohibited from creating or perfecting a new lien, so a tax debt that would otherwise have been secured may be discharged as an ordinary debt. Once the lien is already on record, it survives. If a notice of federal tax lien has not yet been filed against you, that is a reason to move rather than wait.
Contact an Experienced New York Bankruptcy Attorney
If you are struggling with tax debt, tax liens, or both, what you need the most is likely strong legal representation from a talented Rockland County bankruptcy attorney. Someone at The Law Offices of Allen A. Kolber, Esq. is looking forward to your phone call. Contact us today to learn how we can assist you through these difficult times.
