- When a tax liability is not paid in full, the IRS may use a variety of methods to collect the taxes owed. Most tax debts trigger bank account levies or wage garnishment, but larger debts may require a lien. The IRS may also choose to obtain a lien on property when no payment agreement can be reached or when a taxpayer seeks to circumvent levies or garnishments.
- If you owe a large tax debt that you cannot repay, filing bankruptcy prior to an IRS filing for a federal tax lien makes it impossible for a lien to be obtained. This is because the IRS cannot file a tax lien against pre-petition tax debt. Before filing for bankruptcy to avoid a lien, you must ensure that you have a specific tax bill and no unfiled returns. If you tax debt is discharged as part of the bankruptcy, an IRS lien will never be attached to that debt. However, when tax debts are not settled, the IRS can have a lien issued after the bankruptcy is discharged.
- Chapter 7 bankruptcy allows for the discharge of income tax liabilities provided that the tax debt meets certain time guidelines. The debt must be owed on a return you filed at least two years prior to filing for bankruptcy. The tax filing year on the return must be at least three years past. Finally, 240 days or longer must have passed since the IRS assessed the debt. The discharge of the tax debt does not discharge a lien that the IRS placed on your property before the bankruptcy filing. However, it can reduce the lien amount based on your private property's equity. If the IRS placed a tax lien on your property for the sum of $40,000 and the Chapter 7 filings reveal that your personal property has a value of only $10,000, the tax lien is reduced to $10,000. A reduction in the lien amount coupled with the discharge of other personal debts may allow you to pay the tax funds owed, which will lead to the eventual discharge of your lien.
- When certain Chapter 13 bankruptcies conclude, IRS tax liens no longer exist. However, the liens are not discharged. In a Chapter 13 bankruptcy, a tax debt that meets IRS time limit guidelines cannot be reduced when a lien has already been issued unless the filer has no property for the lien to be placed on. In this situation, your possessions are assessed and the tax liability is reduced to equal the value of your personal property. A payment plan is then assigned based on this sum. The regular installment payment may be reduced further if it exceeds your ability to pay. While you are enrolled in a Chapter 13 bankruptcy plan, the IRS cannot seize your property. When you complete the plan, all tax debts will be fully paid, which eliminates the IRS lien.
- Always consult with an attorney who specializes in bankruptcies prior to filing for Chapter 7 or Chapter 13 to discharge tax debt. An improperly timed bankruptcy filing could keep you from reducing your income tax liability and leave you vulnerable for new IRS tax liens when the bankruptcy plan concludes.
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