The IRS Cannot Collect If You are Bankrupt!
Regardless of the reasons, many people fall on hard times financially. The IRS may think that they also must be settled for tax debts, increasing the amount owed to creditors. And unlike other bill collectors, the IRS can be very ruthless in their attempts. If the IRS decides to pursue particular collection methods, they could wreck a taxpayer’s life definitely. Offering a bit of protection against the IRS’s worst debt collection techniques is filing for bankruptcy. Bankruptcy is often misunderstood by taxpayers. It is viewed as an easy way to escape from debts. This isn’t so. Bankruptcy was first designed as a way that allows people to search for legal debt relief, and that includes tax debt relief. When you file for a Chapter 7 bankruptcy, there is a good chance that, along with all of your regular debts, your tax debt will also be erased. This can occur, but there’s of course no guarantee that your tax debt will be included. For anybody filing a Chapter 11, 12, or 13 bankruptcy, they will be provided the ability to move the IRS into settling for a payment deal and settle their IRS problem. When you file for bankruptcy, you receive legal protection which is normally called the ‘automatic stay’. The IRS and all of your creditors must stop all actions against you as soon as you have filed for bankruptcy. The only way creditors can bypass the stay while your bankruptcy is still being dismissed or discharged is to appeal to the bankruptcy court. Although the IRS is a government entity, judges rarely lift the automatic stay. Usually, in order for that to occur, the IRS is responsible for proving that a form of fraud is being conducted by the taxpayer who’s filing for bankruptcy. You have more serious IRS issues on your hand if you are conducting fraud. Tax debts are merely frozen until the bankruptcy claim is dismissed or discharged. The statute of limitations resumes when bankruptcy is dismissed, definitely prolonging it. When specific conditions such as the three-year rule are satisfied, tax debts are possibly definitely cancelled with a Chapter 7 bankruptcy claim. The 3-year rule essentially says that all tax debts considered are at least 3 years old from April 15 of the year it was filed. Also included in the rule are extensions. There is also the 2-year rule which includes taxes filed 2 years before bankruptcy. Taxes assessed 240 days before filing the bankruptcy claim is applicable in the 240-day rule. But even if a Chapter 7 bankruptcy is filed, loopholes still allow the IRS to collect. If the IRS recorded a tax lien before the bankruptcy was filed, then, even after filing, the IRS still has first right to any property that the taxpayer held at the time of filing for bankruptcy. The other forms of bankruptcy, Chapter 11, 12 and 13, are usually re-organization bankruptcies, and their main benefit is to buy time to pay a tax debt and settle their IRS issue.
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