When dealing with financial constraints due to high tax debts, you need to find solutions to have your debts forgiven. Among the options you may explore, filing for bankruptcy may be an ideal alternative to deal with IRS tax debt. Therefore, you need to know the requirements for available types of bankruptcy you could file to relieve your IRS tax debts. Also, you should know whether you are eligible for tax reliefs. Usually, the type of bankruptcy you file has particular guidelines you must follow for possible tax relief.
Navigating the different procedures by yourself is challenging, especially if you lack prior knowledge and experience of filing for bankruptcy for your IRS tax debts. Therefore, you must consult an experienced bankruptcy attorney who understands IRS reliefs and can guide you on the most effective type of bankruptcy to file.
With your lawyer’s help, you will have a stress-free process that increases your chances of having your tax debts forgiven. In return, you pay your debts later and evade paying particular taxes. At the Los Angeles Bankruptcy Attorney, we work hard to help clients file for bankruptcy and debt settlement alternatives. With our many years of experience in bankruptcy, you can rely on us to help you reduce your IRS tax debt.
Understanding IRS Tax Relief
The International Revenue Service (IRS) is responsible for collecting revenue and enforcing tax laws. The IRS acts as a creditor if you cannot make all the revenue payments as required at the end of each taxation period.
Since the financial responsibilities imposed on any earning individual must include the payment of taxes, a default in making timely payments will set debt on your part. Subsequently, you will have incomplete arrears owed to the IRS that you must account for.
However, when you consult your bankruptcy lawyer, he/she may advise you to file for different types of bankruptcy. This way, you will manage your debt repayments to the IRS or do away with any existing dischargeable debt leading to significant tax relief.
If your bankruptcy status receives approval, you will benefit from a temporary tax relief that protects you from creditors' claims, including any notifications from the International Revenue Service. However, as stated, the type of tax relief you benefit from dramatically depends on the type of bankruptcy you choose to file. Hence, it is necessary to go over all the requirements to help you reach a practical solution that relieves your debt settlements.
The two main types of bankruptcy that will be efficient in IRS tax relief are:
Chapter 7 Bankruptcy
Upon choosing to file for chapter 7 bankruptcy, you will have to hand over your assets to selected trustees for liquidation. The liquidation process involves selling assets to generate financial resources. Afterward, the group of appointed trustees will distribute the sourced revenue to your creditors to settle the outstanding debt amounts.
It is important to remember that the trustees are court-appointed and should operate independently. Subsequently, you or your lawyer will have limited opportunities to negotiate for leniency in the asset sale and liquidation process. Hence, you want to identify the essential assets that you need to hold on to before giving the court and trustees access to your property to avoid future inconveniences.
Under chapter 7 bankruptcy, the liquidation process may take up to four months, as the trustees settle your debts. Since the debt repayment preference falls on essentials like child support and upkeep, alimony, and other domestic financial support, most of your IRS debts may fall under a secondary category, meaning that they may fall under dischargeable debts.
When your tax debts fall under the dischargeable category, the bankruptcy system can do away with them to allow for the actual payments. Your bankruptcy lawyer can be pivotal in helping you include the IRS tax debts in the dischargeable category, provided your case meets the set requirements.
Chapter 13 Bankruptcy
Alternatively, your lawyer may advise you to file for chapter 13 bankruptcy to help deal with the IRS tax debt. Under this category, also known as the reorganization strategy, the court will allow you to restructure your income and distribute it to appoint trustees who will settle your debts.
However, chapter 13, bankruptcy imposes more requirements than chapter 13, as it requires a more consistent means of the debt payment. The most crucial need to fulfill is providing proof of a steady source of income. To do this, you will have to provide relevant documents from your employment that ascertain the existence of an employment position, coupled with payment slips from recent months.
Moreover, to qualify for chapter 13, it is crucial to reach the required financial bracket, which is often higher than in chapter 7. The higher eligibility is exclusive for chapter 13 bankruptcy, as it is usually only available for working individuals with sustainable income sources.
Like chapter 7 bankruptcy, the repayment of debts applies for a specified period that lasts three to five years. During this time, the trustees appointed to handle your debt repayments will receive your funds and distribute them to your creditors, including the IRS. After the non-dischargeable debt payment, the bankruptcy may lead to wiping out the outstanding dischargeable debt that is not a priority.
The Effect of Filing for Bankruptcy on your Tax Debts
Upon filing for bankruptcy, the court acknowledges your application by imposing an automatic stay for your case. With the automatic stay status, you will receive protection from the creditors' claims because it serves as an injunction to stop the IRS from making continuous claims on your tax debts.
After declaring bankruptcy, the IRS will face restrictions that keep them from:
Filing for Tax Lien on Your Property or Account
A lien is a legal extension that, if applicable, gives the IRS the right to make claims or place security interest on your account and any property linked to the lien. While some lien impositions are inevitable, filing for bankruptcy on time and making efforts to begin prompt tax payments may reduce the possibility of mandatory lien payments.
Sending you Payment Reminders in Writing
Additionally, filing for bankruptcy will ease you off the stress of dealing with probing letters that continuously remind you of debt repayments. When posting payment reminders, the IRS, like other creditors, may be keen to use harsh language to apply debt repayment pressure.
However, upon receiving an automatic stay from the status of being bankrupt, the court will stop the letters, giving you ample time to manage your finances and begin a smoother repayment procedure.
Imposing Additional Payments for Your Existing Account
An automatic stay will also prevent the IRS from garnishing your accounts with any additional mandatory payments that arise from your debts. Sometimes, the garnishing imposes defaulting penalties that pile up on your debt count, making a higher cumulative amount than you should have paid initially.
Thanks to declaring bankruptcy, the IRS will not impose the default fees and will, therefore, not increase your outstanding payments. However, your bankruptcy attorney should prepare all the required documents to support your claims for protection. Without an elaborate plan, the creditor may find a way to include the penalty fees, meaning that accumulation will still be ongoing.
Acquiring Additional Debt After Filing for Bankruptcy
Thanks to your bankruptcy status’s continuity, you will benefit from excluding IRS creditors demanding payments directly from your account, as all financial responsibilities are now on the trustees. Despite this, if you incur any additional tax debts after filing for bankruptcy, you will uphold financial obligations to clear the payments without any protection from your automatic stay.
As a result, the stay will only apply to the extent that your IRS debts fall within the set eligibility, failure to which may expose you to separate financial burdens altogether.
Additional Limitations to the Operation of Your Automatic Stay
Apart from failing to cover any debts that you acquire after filing for bankruptcy, an automatic stay may also be ineffective to your case based on other limitations. Making proper consultations with your bankruptcy attorney will help you shed light on some of these complications to avoid late discoveries that could cost you a lot of money in debt repayments. Some of the restrictions imposed on an automatic stay include:
The Time Limit
Usually, you will have to operate promptly after receiving a stay for filing for bankruptcy, based on the existing time limit. The court attaches a thirty-day time allowance to keep IRS and other creditors at bay as you partner with independent trustees to distribute your liquidated assets or structure installment payment plans under chapter 13.
The rationale behind the set time limit is to restrict debtors from exploiting the availability of bankruptcy claims, as debt evasion cases would be more rampant with additional time availability. Subsequently, with the thirty-day limit, you can approach a bankruptcy court and request assistance in declaring bankruptcy for the tax relief.
The Filing Period
Moewovwe, you need to understand that an automatic stay only applies for bankruptcy filed within a specific period. Usually, the stay does not act retrospectively, meaning that the protection you receive is limited for any bankruptcies filed in the previous year.
On top of this, the situation will cause more complications if you filed for at least two types of bankruptcies within the previous year and later revoked them for several reasons. For example, suppose a court had granted you the declaration of bankruptcy that you later withdrew from receiving an unexpected source of income. In that case, you may have a more difficult time entering any negotiations with the court.
However, suppose your bankruptcy attorney has any useful information to justify your previously withdrawn bankruptcies. In that case, you may succeed in receiving a time extension for the automatic stay, regardless of whether you filed it in the previous year or the recent past. This way, you obtain adequate time to organize your finances and figure out the best repayment strategy for your interests.
The Imposition of Mandatory Tax Liens
As discussed, filing for bankruptcy will grant you protection from your creditors by imposing an automatic stay. However, the stay will only be functional if the mentioned restrictions do not affect your case, meaning that you have filed for bankruptcy within the recommended time frame and have not accumulated additional debts after filing for bankruptcy.
Sometimes, even after the effective filing for bankruptcy, the IRS creditors may still have access to your accounts by imposing mandatory tax lien. In this situation, the lien will transform your debts, leading them to categorization under secured obligations. Consequently, your automatic stay will not offer protection from payment of your IRS debts because the lien supersedes the provisions available in bankruptcy.
The stringent nature of tax liens may affect your financial status significantly, as you may also have to pay debts that would have otherwise been dischargeable. However, you do not have to worry about falling within the mandatory IRS tax lien category, as long as you continue to make prompt payments under the structured bankruptcy payment plan.
When the IRS decides to impose the tax lien on your account, they will issue you a notice that includes the account details, along with the specific location of your property. Often, they have the property locations in the documents in case of a need to extend the lien on other assets. This way, they will have an easier time accessing the identified properties for further actions, if need be.
You also need to note that you may also have the chance to decide on the property you disclose for lien’s exercise, as they are still under your name until the lien takes effect. Moreover, with your inclusion in making a decision, you will give the property access within a reasonable value to support the debt payments you need to clear.
The lien’s validity period continues for up to ten years beyond the IRS receiving your debt payments. Therefore, the extended duration may limit your financial flexibility, including the ability to enter other agreements that require applicants to be free from restrictive liens. Nevertheless, remaining compliant with IRS liens’ terms will alleviate the hectic period you may otherwise face. Some essential pointers to uphold during the lien period include:
Issuing Specific Assets to Court for the Debit Payment
Cooperating with the court and providing the required assets to help with debt repayment goes a long way in creating a smooth, problem-free period, as you will not face any additional penalties.
Make Full Payments for Your Lien
Secondly, you need to make complete payments before receiving a release from the obligation. Hence, your bankruptcy lawyer will be beneficial in helping you identify assets for surrender to the court-appointed trustees for a proper payment plan.
Plan for Adequate Negotiation Strategies Beforehand
Lastly, your bankruptcy lawyer should engage you in discussions to create persuasive negotiations that may need to enter with the court. Sometimes, the claims in a lien document may demand too many assets for surrender, leaving you in a disadvantaged position. As a result, negotiations will alleviate the situation and help you find a middle ground for a comfortable repayment scheme.
Dischargeable Tax Debts Under IRS Tax Relief
If you successfully file for bankruptcy and meet all the requirements set out in the IRS debt liability repayment plans, you will be eligible for the discharge of some debts. With the tax relief that eliminates your dischargeable debts from the list of liabilities, you will have an easier time settling the outstanding critical amounts, giving you a more manageable period. Before you qualify for the tax relief, your case must include:
- Filing for bankruptcy in good faith that excludes tax evasion strategies
- Filing a tax return two years before filing for the current bankruptcy status
- Any taxes you owed for three years before filing for bankruptcy. You should also include official documents that you received to time extensions related to the tax debts.
- Tax amounts that you included as liabilities within two hundred and forty days before filing for bankruptcy.
- Debts that you acquired from your business or other sources of income like employment.
Contact a Los Angeles Bankruptcy Attorney Near Me
If you or your loved one currently has IRS tax debt you cannot pay, a tax relief could reduce the financial burden. Among the different ways to seek tax relief is by filing for bankruptcy. This will help keep your creditors at bay until you can afford to pay the tax debts. Nevertheless, the various application processes you need to undertake requires a bankruptcy attorney’s assistance.
At Los Angeles Bankruptcy Attorney, we dedicate our skills to providing reliable bankruptcy services to clients with IRS tax debts in Los Angeles, California. Over the years, we have handled numerous cases that opened us up to multiple alternative ways to find solutions for you. If you or your loved one needs IRS tax relief assistance by filing for bankruptcy, call us today at 424-285-5525.