CAN I ELIMINATE LIABILITY ON IRS AND STATE TAXES?

As the old saying goes, "The two things your can't avoid are death and taxes." This is oftem true when you go through a straight bankruptcy, whether it be income tax, employee withholding tax, or social security.

There are some exceptions however, where taxes can be wiped out or "discharged" as it is called in a bankruptcy. For example: if, at the time of filing, you owe unsecured income or gross receipts tax and a tax return was due and filed more than three years ago, the debt may be discharged. If it has been over 3 years since the tax return was due and you filed your return late, but more than two years ago, then they can be discharged as well.

There is a problem in situations like those described above. Sometimes the IRS or State tax agency files a "Notice of Tax Lien" with the County Recorder If they do this BEFORE you file your bankruptcy, they become a "secured creditor" with an ownership right in EVERY THING YOU OWN, not just land or homes. Even where their debt can be wiped out in bankruptcy, they can still demand and be the owner of any rights you had before filing. They have a lien even in your retirement. I have jokingly told clients that a tax lien even attaches to everything right down to their jocky shorts even though there are laws that say the tax agency can't take them. If you have assets, even ones the law says are protected or "exempt", they are still secured in those items and you will often still end up paying the tax agency eventually when they exercise their rights in the secured asset.

If you seek relief under a reorganization proceeding of the Bankruptcy Code, such as Chapter 13 Reorganizations for individuals and single owner business, priority taxes that were not dischargable in a chapter 7 case generally cannot be avoided or wiped out in a chapter 13 Reorganization. There are some very limited and technical exceptions to this however. Even if a tax is not dischargable, the tax may be repaid over a period not to exceed five years and in a monthly amount the taxpayer often can afford, not in the monthly amount the tax agency is demanding. Chapter 13 is the only tax repayment relief available to the average taxpayer other than having the IRS or State tax agency agree to your terms of repayment.

Once Chapter 13 is filed, the tax agency cannot garnish your wages, seize your bank account, close your business, or take any other collection effort. They are "Restrained" from doing so by Fedral Bankruptcy Court orders

As stated above, there are two kinds of tax obligations. One is a secured obligation, where the IRS or State tax agency has perfected a tax lien on your property. The other is an unsecured obligation.

If you file a Chapter 13 and your tax obligation is unsecured, then the tax obligation ceases to be allowed to add further interest or penalty charges. This could amount to a substantial savings over a 5 year period of repayment. Think of it as an "interest free loan" from your friendly tax agency. On the other hand, if they have a tax lien making them a secured creditor, you can still control the debt, but you will end up paying interest, but no more penalties through the plan of reorganization.

There are other tax situations too complicated to explore in this presentation, but which should be considered in the filing of a bankruptcy.

If you have an unmanageable tax obligation, you should act immediately to determine your bankruptcy options and avoid the possibility of having the IRS or State tax agency takeing action to collect from you or perfect a tax lien.

There may be relief for you, even if you owe the IRS!