Tax and Tax Lien FAQ

Unfortunately, most taxes (other than real estate taxes) cannot be discharged in bankruptcy, but a bankruptcy can help nevertheless. First, most tax penalties can be discharged. Second, some older taxes may be dischargeable. And by discharging other debt, you will be left in better financial shape to make payments to pay off the taxes you are left owing. Or you may be able to use a Chapter 13 Plan to pay off taxes in full, or to provide help with tax liens. The rules can be complex in application.

This is an area where careful planning and knowledgeable guidance is critical. If you need help with back taxes, please call us at (856) 596-2828 to schedule a free consultation.

I have large tax liens against me. What do I do?

When you do not pay federal taxes you owe, after giving you notice and a demand for payment, the IRS has a lien for the amount of taxes, penalties and interest on all your property and rights to property. IRC sec. 6321. At that point, the IRS can levy on your property, and can record a “notice of tax lien” in the proper recording office in your state. Filing a bankruptcy can “stay” any levies, further tax liens, or further collection against you for a while, at least while your bankruptcy is ongoing or until you receive a bankruptcy discharge. How a bankruptcy filing affects the IRS’s ability to collect taxes or file tax liens in the future or their ability to collect taxes from you is very much dependent on your facts and the type of bankruptcy you file. In most cases, it is very important to try to file a bankruptcy BEFORE the IRS records their notice of tax lien. For example, while some taxes can be discharged in bankruptcy, once they are included in a tax lien which is filed before your bankruptcy, the IRS may continue to have the right to collect those taxes from you based on the tax lien notice. Also, the IRS has the broadest collection rights of any creditor, and can even collect taxes out of your pension.

State tax liens operate in a similar manner, with a similar effect.

It is possible to “cram down” or reduce the dollar value of tax liens in a Chapter 13 case.

No matter what your situation is, we strongly suggest you and your tax advisers consult with an experienced, qualified bankruptcy specialist as early as possible, to understand the critical details of this process and to plan carefully.

IRS Circular 230 Disclaimer: To ensure compliance with IRS Circular 230, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.

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