Taxes and Bankruptcy | Force the IRS to Take Your Payments

irs tax debts | taxes and bankruptcies

Taxes and Bankruptcy | Force the IRS to take Payments on Your Terms

Can you File Bankruptcy with the IRS

Bankruptcy and Tax Debt, Generally

Like most debts types, back taxes can turn into major problems. Can IRS tax debt be discharged in bankruptcy? It depends. The rule is taxes and bankruptcies don’t match. But bankruptcy and tax debt sometimes works. It’s helpful then to know the rule about taxes and bankruptcy. In general, bankruptcy can eliminate some tax debt in a bankruptcy.

The Rule

The rule is that all debt types go away in bankruptcy, which is kind of what most of us expect. But I think most of us think, on some level, that there are some things that don’t go away.

Exceptions to the Rule: IRS Tax Debt

There’s a part of the Bankruptcy Code that lists all kinds of debt that don’t go away.  The exceptions to discharge are many, and it won’t surprise you to learn that right there with student loans and child support is debt to governments.

Exceptions to the Exceptions

There are some circumstances where IRS tax debt can be discharged in a Chapter 7 bankruptcy. Beware, each one of these has its own ins and outs, and they are not as simple as they seem.

Factors to Determine If You can Remove Tax Debt

You can eliminate in bankruptcy debts for taxes maybe  if:

  1. the taxes were due more than three years ago
  2. you filed the tax return over 2 years ago
  3. the return was not fraudulent
  4. taxes were not assessed in the last 240 days


Again, each one of these has nuances that are very tricky. For example, there is a lot of confusion about what it means when a tax return was “due.” You’d think that was pretty straightforward. Also, “three years ago” seems cut-and-dried, but it also has lots of twists and turns, and it’s not what you think. This is why this Santa Clarita bankruptcy attorney won’t give an opinion about whether your taxes are dischargeable or not. I’m not a tax expert, and you’ll want to check with your CPA or other tax preparers who review your transcripts to determine if you really, truly do qualify to have them discharged.

If all these factors are present, your taxes possibly may be able to be discharged in a Chapter 7 bankruptcy.

Substitute for Returns (SFR), the IRS, and Bankruptcy Discharge

What is an SFR with bankruptcy

What if the IRS files a tax return for you? Can you later file your own and then discharge it in a bankruptcy? Until recently, yes.

When you don’t file a tax return, the IRS can file a Substitute for Return for you. When the IRS files an SFR for you, this is not doing you any favors. They don’t take any deductions, don’t try to minimize what you owe, or really anything else that helps you, at all.

The recent Smith SFR tax case is severe but clear

In 2016, the 9th Circuit Court of Appeals held that if you file a tax return after the IRS files a SFR for you, you cannot discharge the tax debt in a bankruptcy.  In re Smith, 828 F.3d 1094 (9th Cir, 2016). This case interpreted In re Hatton, 220 F.3d 1057 (9th Cir, 2000), in light of the 2005 BAPCPA amendments which define “return.”

This is a very harsh result, but it provides very clear guidance that there’s a focus on the taxpayer conduct. Make every honest and reasonable effort to file your tax return, even if you think you’ll owe the IRS. If they file one for you, you’re stuck.

That being said, there is a slight chance that the right set of facts can make new law and create an exception to Smith. The debtor in that case filed his return 7 years late, and three years after the IRS assessed a deficiency against him. Something less egregious can possibly be distinguished with no guarantee and years of appeals.

The SFR rule with taxes and bankruptcy

However, the safe answer is the harsh one: after the Smith ruling in the Ninth Circuit, where California is, once the IRS files an SFR, you cannot discharge that tax debt in bankruptcy… ever.

Consider repaying the taxes in a Chapter 13. Read on.


Remove Tax Debt Interest?

If all of the above factors are not there, yet your taxes and interest are high, you may still be able to pay them in a Chapter 13 bankruptcy. which is like debt consolidation. This forces the IRS to take their debt on a repayment plan. This can result in a savings of thousands of dollars.

Offer In Compromise

Offers in Compromise are  solutions for IRS problems that a bankruptcy cannot help or is not the best fit. If the majority of your debt is tax debt and doesn’t fit the test above, you’ll want to contact an expert with IRS problems to help in eliminating tax debt.

Stop Tax Foreclosure

If the local county tax assessor gets a lien on your home, it’s possible to force a foreclosure. A Chapter 13 could stop tax foreclosure filed by the county for back taxes and save your home from foreclosure.

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