Eliminating IRS Debt

For many people, filing for bankruptcy becomes the best option when tax debt becomes overwhelming. An experienced bankruptcy attorney in Dallas, TX, can help you decide whether you might qualify for tax forgiveness if you owe back taxes to the Internal Revenue Service (IRS).

The good news is that through bankruptcy, it is possible to discharge old tax debt, interest and penalties. To discharge tax debt in bankruptcy, you must meet several very specific requirements including the 3/2/240 Rule. All of the following requirements must be satisfied:

  • the taxes became due more than three years prior to filing bankruptcy (the three-year rule);
  • you filed your return more than two years prior to filing bankruptcy (the two-year rule); and
  • the taxes must have been assessed at least 240 days prior to filing bankruptcy (the 240-day rule).

The most common bankruptcy option when you owe the IRS is a Chapter 13 bankruptcy. Keep in mind that before you file for a Chapter 13 bankruptcy, you must:

  • file all tax returns for the last four years before the bankruptcy filing;
  • during the bankruptcy process, you must continue to file, or get an extension of time to file, all required federal tax returns;
  • during the bankruptcy process, you must continue to pay any taxes as they become due.

The benefits of filing for a Chapter 7 bankruptcy include an “automatic stay” to stop creditor collections. Approximately ninety (90) days after the case is opened, your debt can be discharged. The IRS does not pursue collection until after debts are discharged. For debts that are not discharged, you can plan for repayment.

If you fail to file a return or stay current on taxes owed during the bankruptcy process, your bankruptcy case can be dismissed.

Attorneys for Eliminating IRS Debt in Dallas, TX

The Texas Bankruptcy Attorneys at Littlefield Law Firm in Dallas, can also help you decide the best ways to resolve outstanding tax issues with the IRS. We represent individuals, small business owners, partnerships, and corporations that files for bankruptcy under Chapter 7 of the bankruptcy code.

We can help you resolve wage levies, avoid tax liens, and even eliminate an existing tax lien.

Other options to eliminate IRS tax debt including filing an offer in compromise or set up an IRS payment plan. An attorney can also help you determine the best options if you and your spouse have joint tax debts or separate tax debt. We can help you find the right path to end tax debt and get a fresh start.

Contact us to discuss your options by seeking tax forgiveness in bankruptcy, making an offer in compromise, or entering an IRS payment plan. An attorney can also help you avoid a federal tax lien and other disruptive collection activities.

Call (972) 812-0900 to discuss your case today.


Discharging Old Tax Claims in Bankruptcy

Income taxes pursuant to Section 507(a)(8)(A) are given priority status based on the age of the tax liability. The bankruptcy laws render recent pre-petition tax claims non-dischargeable, but to allow the discharge of certain old or “stale” tax claims.

Two tests are employed to determine how a tax liability should be classified and whether it is exempted from discharge pursuant to Section 523(a)(1)(A) include:

  • the three-year rule;
  • the “240-day" rule.

Under the “three year rule,” the court determines whether the taxes were due within three (3) years prior to the filing date of the bankruptcy petition, including any time extensions. 

Under the “240-day rule,” Section 507(a)(8)(A)(ii) provides that taxes assessed within 240 days prior to the date of the filing of the petition are entitled priority status and thus are non-dischargeable tax liabilities. In other words, the “240-day rule” requires that if you file for bankruptcy within 240 days of your last assessment, the debt cannot be discharged.

For the 240-day rule, the court looks at the date that the particular tax was assessed not when the tax was incurred or when the applicable return was due. The 240 day assessment period is suspended for any period during which:

  • an offer in compromise is pending with the Internal Revenue Service (and during a 30 days period thereafter); or
  • a waiver of the statute of limitations on assessment is in effect.

Because of these rules, when you decide to file for bankruptcy becomes very important if you have an old tax debt. When you have outstanding tax liability, you should consult an experienced bankruptcy attorney to ensure that you correctly ascertain and take into account the relevant dates that might impact whether the tax liability can be discharged in bankruptcy.


Making an Offer in Compromise to Settle IRS Debt

Depending on your circumstances, the attorneys at Littlefield Law Firm in Dallas, TX, might be able to help you apply for an "Offer in Compromise" to settle past due debt to the I.R.S. for unpaid federal taxes. Before the IRS can consider your compromise offer to settle an outstanding debt, you must come current with all filing and payment requirements.

Keep in mind that you are not eligible for an offer in compromise if you are currently in an open bankruptcy proceeding. If you have filed for bankruptcy, then the resolution of your outstanding tax debts will take place within the context of your bankruptcy proceeding. If you have an open audit or outstanding innocent spouse claim, then you should wait for those issues to be resolved before you submit a compromise offer.

By making an "offer in compromise" to the IRS, you might be able to settle your tax debt for less than the full amount you owe. If you cannot pay the full amount without creating a real financial hardship, then an offer to settle the debt might be your best option. 

An experienced bankruptcy and consumer protection attorney at Littlefield Law Firm in Dallas, TX, can help you evaluate the best way to eliminate IRS taxes that you cannot pay.


What is an Offer in Compromise?

An offer in compromise pursuant to 26 U.S.C. § 7122(c) and (d) is an administrative proposal, evaluation, and negotiation to determine if the IRS will accept a longer payment period or a lesser amount than the full tax due.

Offers in compromise often arise because of the taxpayer’s inability to pay. The offer in compromise must be submitted on Form 656. 

Factors considered by the IRS when evaluating your compromise offer include:

  • your ability to pay the full amount;
  • your income;
  • your expenses; and
  • any equity you have in other assets.

The IRS will often approve an offer in compromise when the amount offered represents the most the IRS can expect to collect within a reasonable period. Our attorneys can help you explore other payment options before you submit the offer in compromise.

An attorney can also help you decide the best payment option including lump sum cash or periodic payment. If the IRS rejects your offer, an attorney can help you understand your options to appeal a rejection within 30 days using Request for Appeal of Offer in Compromise, Form 13711 (PDF), which was last revised in October of 2017.

The IRS will not compromise any restitution amount ordered by a court or a tax debt that has been reduced to a judgment. Additionally, an offer in compromise will not be accepted if the IRS has referred your case involving all of the liabilities identified in the offer to the Department of Justice (DOJ).


Avoiding a Federal Tax Lien

If you owe taxes, a lien can be placed against any of your current or future property. When this happens, a Notice of Federal Tax Lien (NFTL) gives the public notice of the lien. The lien also establishes the priority of the IRS claim versus the claims of other creditors.

The IRS might also levy your assets and keep any proceeds received from the levy. An attorney at Littlefield Law Firm in Dallas, TX, can help you determine the best ways to avoid the filing of a federal tax lien or levy.


Additional Resources

What You Should Know about Chapter 13 Bankruptcy and Delinquent Returns (PDF) - Find tax information on bankruptcy and outstanding tax debts in Publication Publication 5082 (4-2013) Catalog Number 62744F from the Department of the Treasury, Internal Revenue Service. FInd information about the Taxpayer Advocate Service (TAS) that helps taxpayers suffering from financial difficulties who cannot resolve their problems with the IRS.

Offer in Compromise Pre-Qualifier - This IRS online tool can help you confirm whether you are eligible for an offer of compromise to settle outstanding tax liabilities and prepare your preliminary proposal. Find links to the Offer in Compromise Booklet (Form 656-B) which provides step-by-step instructions and the forms needed to submit a compromise offer including Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses.


This article was last updated on Friday, April 20, 2018.

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