Uncle Sam has rules for pretty much everything. As a result, one should not be surprised to have rules guiding bankruptcy discharge. With this, if there is any reason for the IRS to object to the discharge, it will. Many of the bankruptcy discharge rules revolve around time.
Income taxes: for chapter 7 bankruptcy, only income tax debt is discharged. 1040 taxes are classified as income taxes as well. Although, one cannot classify property taxes and trust as income taxes. Make sure to check the type of tax you owe to know if Chapter 7 will eliminate the debts.
All returns for the past two years must be filed: At the time the taxpayer filed for bankruptcy, all returns for the past two years must be filed at least. This waiting period is valid even if the taxpayer filed the return on time. Failure to file will make Uncle Sam prepare a substitute return and use such to calculate the arrearage of the taxpayer.
Tax debts should be three years old at least: Your income tax debt must have existed for three years. One should note that the tax date is not always the 15th of April. There are years the tax day could be 16th, 17th, or 18th, depending on holidays and weekends. Many IRS lawyers will usually decline to discharge a day or two, making it essential to file the petition at the right date.
The Tax assessment is less than eight months old: In a case when Uncle Sam has not had time to assess the debt for the past 240 days, the debt cannot be discharged. There might be no way to know if the IRS has already assessed the debt since it involves an internal accounting process.
In a case When the tax Debt cannot be Erased: What Happens?
Many taxpayers fall in this category, but there are a series of legal options they can take. While a tax lawyer will advise you on the best action, you have the ultimate decision.
Installment Payment: you might discuss with Uncle Sam about a payment plan. Once you commence an installment payment, Uncle Sam will leave you be since they are basically after the funds. They are not so keen on garnishing your wages.
Consider installment agreement if there are funds. If not, make sure to consider other options.
Try the "Offer in Compromise" Program: Uncle Sam put forward some set of programs to take care of taxpayers with little or no funds. The offer in the Compromise program is one of such. With this program, the taxpayer pays a part of their tax bill, and Uncle Sam forgets about the rest.
This is an extremely complex program, and only a handful of taxpayers qualify. In addition, if the taxpayer has an asset like a diamond ring or any worthy or valuable possession, Uncle Sam will mandate the taxpayer to sell it.
Consider Bankruptcy: Many people, in a bid to employ the automatic stay approach, file for bankruptcy. This is valid if there are threats from Uncle Sam to garnish one's wage, levy the bank account, or other unpleasant things.
Filing for bankruptcy comes with the con that the debtor needs to wait for eight-year before qualifying to get another such discharge (chapter 7). As a result, while filing for bankruptcy comes with immediate relief and allows you to discharge tax debt, there is a long-term headache one needs to prepare for. With this, make sure to wait until you qualify, especially if your waiting period is simply a couple of months.
Should I be worried about my tax refund?
Many people worry about this question, especially those expecting a huge return. Make sure to discuss this with your tax attorney or adviser. You might be better off delaying the filing till you get the tax year refund for the previous years.
Technically, when taxpayers file for bankruptcy, the trustee will receive their non-exempt property, which includes the tax refund. This policy varies based on location, so one might qualify to employ the tax return's wildcard exemption.
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