Let us assume an individual has typical credit card debts in the amount of $15,000. The individual has filed tax returns every year, but, being self-employed, has not been able to fully pay personal income taxes each year. As a result, on years 1985 through 1990 there is an outstanding tax, interest and penalty liability of $50,000. This individual has a car which was financed within the last two years, rents a home, and has $2,000.00 in an IRA.

The penalties on the taxes will accrue at somewhere between $250.00 and $500.00 per month, depending on whether the penalties have reached their statutory maximum. Interest will be added at the rate of 9% per annum compounded daily. The IRS will pursue enforced collections.

Filing a Chapter 7 bankruptcy petition invokes an injunction called the "automatic stay". All collection activity must stop. A bankruptcy estate is created and is examined by an appointed bankruptcy trustee. The trustee reviews the case to determine whether any assets are available for liquidation and distribution to unsecured creditors.

In this fact scenario, the recently financed car has no equity, the household goods and furnishings are average, and the only funds available are $2,000 in an IRA. All of the listed assets are exempt and the trustee would "abandon" the property back to the debtor.

A transcript obtained from the IRS and FTB Disclosure Departments in this case revealed that all of the taxes met three specific criteria which classify them as general unsecured, non-priority taxes and therefore dischargeable in the Chapter 7 bankruptcy.

The criteria for dischargeability are:

1. The tax return must be due, including applicable extensions, more than three years prior to the filing of the bankruptcy.

2. A tax return must have been filed more than two years prior to the filing of the bankruptcy. (This brings up the issue of what a "filed" tax return consists of.)

3. The taxes must have been assessed more than 240 days prior to the filing of the bankruptcy.

Once a bankruptcy is completed, the IRS and FTB must follow through with an abatement of the dischargeable tax, interest, and penalties. The abatement consists of the computer being adjusted to show no balance due and the tax liens being released. (Some liens need to be negotiated.)

A Chapter 7 bankruptcy can be a very powerful option which can be utilized to prevent, terminate, and control IRS and State collection activities.



 About Gary A. Quackenbush and GQ LawFlyer about GQ LawIRS and Tax InformationOther Services and Articles
























Back to Top

Back to GQ Law