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You're in serious debt. You owe a number of creditors and have no hope of paying them. The worst part is one of your creditors is the most powerful collection agency in America...the Internal Revenue Service.
A fateful decision...You've decided to declare bankruptcy, and while going through your creditors you wonder if the IRS can be included. The IRS has a number of rules and restrictions on including an IRS debt in a bankruptcy. Not only that, but you're not completely free of IRS collection actions while you're in bankruptcy.
Let's go through the life cycle of an IRS debt and a bankruptcy:
Can you include your IRS debt in a bankruptcy? Yes, but your debt has to meet 3 standards. If it doesn't meet even one of them then you've got to figure out another way to pay the debt. The 3 standards are:
1. You can not include any tax debt that is less than 3 years old. So if your tax debt is from last year it can't be included.
2. You can not have any unfiled tax returns.
3. You can not have any tax returns that were audited because you committed tax fraud.
One down...Let's say that your IRS debt meets the requirements and you can include it in your bankruptcy; now what? The IRS can't take any collection action against you while you're in bankruptcy under the Automatic Stay of Collections.
There is a loophole for the IRS if you're a serial bankruptcy filer. If you've filed bankruptcy and it had been dismissed within the last year the IRS only has to abide by the Automatic Stay for 30 days. If you've filed two bankruptcies then the IRS can ignore the Automatic Stay.
Do they ever quit? While the IRS can't collect from you here's what they can do: The IRS can perform an audit to determine your tax debt amount. The IRS can send you an annual notice stating your debt amount. The IRS can take any tax refund you would have due and apply it to your debt, or if you have a trustee handling your bankruptcy the refund goes to them to be distributed to your creditors.
An end in sight...What happens to your IRS tax debt after the bankruptcy is discharged. If your tax debt was included and discharged then the debt is non collectible. But wait; remember those 3 standards for including a debt in bankruptcy. Any tax debt that happened because of one or all of those reasons is still eligible for collections. In addition interest and penalties have accrued on that portion of the debt during the time you were in bankruptcy.
The IRS and bankruptcy do not go together, but if you know your rights you can make the decision you need about your debts and be able to get your life back on track.
Now you have the smoking gun...Use it!
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