Robert G. Nath
Over 30 Years'
IRS and State Tax
Robert G. Nath, PLLC
1775 Wiehle Avenue
Reston, VA 20190
Taxes and Bankruptcy
- How does a Chapter 7 bankruptcy work with respect to taxes?
If your taxes are dischargeable, and you file for Chapter 7, then the bankruptcy court will normally issue a general "discharge." This is the piece of paper that officially wipes out your "dischargeable" debts, including taxes if they are in fact dischargeable. The IRS as a creditor gets a copy of this discharge. It then assigns an agent to determine if it agrees that the taxes are eligible for that discharge. In most cases, the agency will agree. The agent then goes into its master computer, adjusts your account down to zero for the tax periods at issue, and that ends the story. The IRS does NOT send you any notice, though you can ask the agency for a "record of account" that will show the zero balance.
- When is the new "means testing" law applicable with respect to taxes?
The major bankruptcy revisions that went into effect October 17, 2005, enacted a "means testing" provision. As a result, people who can pay something toward their back debts (including taxes if these are owed) will now be required to do so. Before the new law, this was not generally the rule. Means testing applies only in cases of "primarily consumer debt." The term "consumer debt" generally means credit card debt and includes other categories of debt as well, but NOT taxes. So the new laws will apply where you have mostly credit card debt but you also owe taxes.
- Does the bankruptcy law stop the IRS from collecting taxes?
Generally, yes. If you file for bankruptcy protection, the IRS cannot seize assets or take a number of other enforcement actions. But it can file a notice of tax lien, issue a "statutory notice of deficiency," or audit your tax return.