Taxes are complicated. So is bankruptcy. Sometimes taxes can be discharged in bankruptcy. And bankruptcy can also be used to protect a person from tax collection enforcement.
DISCHARGING TAXES IN BANKRUPTCY
There are numerous sets of rules your attorney must know for discharging taxes in bankruptcy:
- There are certain timing rules to qualify for discharge.
- There are rules related to tax liens.
- The type of liability must be eligible for discharge.
- Some past or current legal matters may also affect eligibility.
NOTE: If there is a tax lien, there are additional, substantial obstacles to deal with. With a qualified attorney’s advice, you might seek to not remove a tax lien, or to have some special protection against the IRS.
WILL BANKRUPTCY STOP AN IRS AUDIT OR IRS COLLECTION?
Just recently, a potential client from Aurora IL asked us whether filing bankruptcy stops an IRS examination. Bankruptcy does not affect an IRS tax audit, and you must move forward with the audit.
However, if you have been contacted for an audit and have not yet filed your bankruptcy case, then speak with your attorney to prepare you for the special bankruptcy concerns in the IRS audit.
If you already have an existing tax debt, when you file bankruptcy, there is some protection against bill collectors, including the IRS collection process. But once you file, your attorney must proceed quickly against the IRS. Failure to follow IRS procedure can cause costly, sometimes irreversible losses to you. It should be clear that effectively handling IRS tax problems in bankruptcy also requires very specialized experience or knowledge with IRS tax representation.
IS A TAX REFUND SUBJECT TO BANKRUPTCY?
You may ask that your tax refunds can be exempted from bankruptcy. Yes, it is possible to keep a tax refund, even in bankruptcy. But this does not mean that IRS will automatically issue your next tax refund. It is important, therefore, to talk with the bankruptcy attorney experienced in tax law about your specific circumstances.