Just about every day I’m asked this question. Can bankruptcy IRS debt help with IRS problems? Most people think or don’t even consider bankruptcy as a possible option for owing the IRS. They’re under this misconception that the IRS is some sort of super creditor and bankruptcy can never discharge taxes at all, and that is simply not the case.
I’m going to talk about three different types of bankruptcies in this video. The first is Chapter 7. You can think of Chapter 7 as something like a liquidation bankruptcy, but since the exemptions, particularly in the state of Florida, are so good, particularly as they apply to your Homestead, to your home, your real property, is not so much of a liquidation as much as you get to liquidate your debts, your tax debts, if everything works out right.
The second is a Chapter 13 bankruptcy, and this is what many people consider sort of a repayment, reorganization sort of bankruptcy. Typically, you’d be making payments back in some percentage of your debt back over a 60‑month period.
The third type of bankruptcy that we’re going to talk about for taxes is actually a Chapter 11. Chapter 11s are typically thought of as business bankruptcies, and they can be very useful in helping to deal with payroll tax problems, because although the payroll tax is never dischargable in a Chapter 11, the interest and penalties can be, so you can actually forge the IRS into a five‑year payment plan with no penalties and no interest, which could save you a significant amount of money over that time.
But back to the Chapter 7 and the Chapter 13, there are three timing rules that I want to explain to you. Now, it took me a couple years to really get these ingrained, so I just want you to be aware of them. The first timing rule is that the returns have to have been due for at least three years, including extensions.
A 2011 return is due April 15 of 2012, but if you ask for an extension, that would’ve been October 15, 2012 plus three years means that that tax return, that 2011 return, cannot be discharged until October the 16th 2015 at the very earliest.
The second timing rule is that the tax returns, if they have been filed late, have to have been filed for at least two years. The third timing rule is the tax assessments have to have been filed for at least 240 days.
Those two timing rules actually apply to both Chapter 11, Chapter 13, and to an individual Chapter 11, not typically a business Chapter 11 because, typically, business Chapter 11’s deal with payroll tax obligations which are never technically dischargable on bankruptcy irs debt.
I know that was a lot of information, but the thing to take away from this video is that taxes can be discharged in bankruptcy irs debt under certain circumstances, but you need someone who really does this all the time to help you figure it out.