Federal Taxes, Bankruptcy and the IRS — How to Protect Yourself from Liens and Collection Efforts

Unpaid federal taxes and the penalties and interest they accrue can result in overwhelming tax debt, liens and serious financial problems that last for years. There are several ways to deal with tax debt, but one of the most effective is to file for bankruptcy. If you file for bankruptcy, the IRS must immediately stop all collection efforts and stop assessing interest or charging additional penalties.

As a Maryland bankruptcy attorney, I’ve seen numerous examples of honest, hard-working people who get a little down on their luck, are unable to pay their federal taxes for a period of time, and end up in serous tax debt. If people don’t deal with the situation, the IRS can put liens on their home and other property, obtain a judgment to collect on their assets, or even garnish wages and accounts. Fortunately, there are several ways to deal with tax debts and keep these things from happening.

Federal Taxes and Non-Bankruptcy Solutions

If you’re hoping to avoid bankruptcy, the IRS does have several alternative ways to negotiate payment of your unpaid taxes, penalties and interest:

Installment agreement:

You can negotiate a plan to pay off the tax debt over a period of time. Approval of an installment agreement can be automatic if your tax debt is not above certain amounts and you agree to pay off the whole balance within a particular time frame.

Offer in Compromise:

You may be able to negotiate with the IRS to pay off less than the full amount of the federal taxes you owe and have them discharge the rest. This may be a viable option if there is doubt as to whether the IRS will ever be able to collect the full amount or doubt about whether you actually owe the full amount.

Bankruptcy and IRS Tax Debt

In my work as a Maryland bankruptcy attorney, I often find the best solution for unpaid federal taxes is to file for bankruptcy. The IRS does not prefer this option because it limits their control over repayment terms and requires them to stop assessing interest and penalties. With any of the options listed above, the IRS continues to assess interest on the unpaid debt. They may agree to stop assessing penalties and stop collection efforts for a period of time, but the IRS almost never stops assessing interest and that can lead to a seemingly perpetual tax debt. When you file for bankruptcy, though, all creditors, including the IRS, must stop all collection efforts and stop assessing interest on your debt except as to secured claims.

Depending on your situation, you may choose to file under Chapter 7, Chapter 11 or Chapter 13 of the bankruptcy code. Chapter 7 will get much of your tax debt discharged if it is older than 3 years and meets other tests, possibly even all of it, but you may be forced to sell property and liquidate assets to pay your creditors. Chapter 11 and 13 allow you to create a debt payment plan you can afford and pay on that plan for up to five years. After the five years, all unsecured debt – including unsecured income tax debt – will be discharged. Chapter 13 is most commonly used for this, though Chapter 11 can be used for particularly complicated cases.

In Maryland, bankruptcy attorney John Burns and his firm can assist in filing for bankruptcy and with IRS negotiations to reduce or eliminate your debt of federal taxes. Call our Maryland bankruptcy attorney’s office at 301-441-8780 to schedule an appointment regarding unpaid federal taxes.