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Chicago Bankruptcy Lawyer > Blog > Bankruptcy > Can You File Bankruptcy on IRS Debt?

Can You File Bankruptcy on IRS Debt?


You bet. In most cases, bankruptcy discharges IRS tax debt, gives taxpayers more time to pay, or both. Back taxes are a big issue for many of the nation’s seventy-five million freelancers. Many parts of the country, especially large urban areas like Chicago, didn’t fully get back to normal until sometime in 2022. So, many freelancers pulled money out of estimated tax payment accounts to help make ends meet. They’re paying for that strategy now.

The IRS adds interest and penalties to tax debt every day. So, the longer taxpayers avoid the problem, the bigger that problem becomes. Very quickly, the problem gets so big that a radical solution, like bankruptcy, is the only way out. A Chicago bankruptcy attorney takes the fear and uncertainty out of this process and guides you through the complex legal process. Usually, the prize at the end of the yellow brick road is the elimination of your tax debt.

Discharge in a Chapter 7

Back taxes are unsecured debts, like medical bills and credit cards. These obligations are usually dischargeable in a Chapter 7.

But most government-affiliated unsecured debts are priority unsecured debts that are only dischargeable in certain situations. These obligations include student loans, alimony, child support, and most importantly for purposes of this blog, back taxes. In this case, the “certain situations” involves the back taxes discharge rules, which are:

  • No Fraud: Most people fall behind on estimated tax payments because they spend the money elsewhere. If the debtor committed tax fraud, which usually means omitting an income stream or blatantly lying about deductions, the tax debt isn’t dischargeable in bankruptcy.
  • Three Years: Taxes are dischargeable if the taxes are at least three years. Note that means three years past due and not on file for three years. That’s the next rule. Also note that Tax Day isn’t always April 15. The IRS has disputed discharge in the past because the returns were a few days short of three years old.
  • Two Years: Furthermore, taxes are dischargeable if the returns have been on file for at least two years prior to discharge. Most Chapter 7 cases take between nine months and a year to wind their way through the system. So, taxpayers have a little wiggle room. Significantly, these returns must be taxpayer-filed returns. Substitute returns or extension requests don’t count.
  • 240 Days: Usually, a Chicago bankruptcy lawyer must order a tax transcript to determine the most recent assessment date. Sometimes, taxpayers can tell by looking at their notices. If a letter includes the total amount due, not just the amount due from a certain year, IRS accountants probably assessed the debt.

Right from the start and until the case is closed, bankruptcy’s Automatic Stay stops adverse IRS actions, like wage garnishment, bank account levy, and lien placement.

Repayment in a Chapter 13

A few people qualify for income tax discharged under the complex rules. A few people also qualify for IRS payment plans and other such relief. But almost everyone qualifies for Chapter 13 repayment plan bankruptcy.

Usually, the trustee (person who oversees the bankruptcy for the judge) divides the past-due taxes into forty-eight or sixty monthly payments. During the protected repayment period, the IRS cannot take adverse actions against the taxpayer, as outlined above.

Additionally, a bankruptcy lawyer can often challenge the amount due and force the IRS into mediation. During bankruptcy mediation, both sides have a duty to negotiate in good faith. So, the IRS must compromise on issues like the total amount due, if that’s what it takes to reach an agreement.

 Rely on a Diligent Cook County Lawyer

No matter what kind of financial problem you are having, bankruptcy could be a way out. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. We routinely handle matters throughout the Prairie State.

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