Dallas IRS Debt Relief Attorneys
Helping Texans Discharge Tax Debt Through Bankruptcy
Dealing with the United States Internal Revenue Service (IRS), the government agency that handles tax affairs, is seldom a pleasant experience. The U.S. tax code is constantly changing and frequently confusing, resulting in some to unfortunately owe more taxes than they might initially realize. This can quickly escalate to a situation where you may owe an exorbitant sum to the IRS.
The taxes you owe will rapidly compound if you take no action. You will be charged both late fees and interest for each month you fail to cure unpaid taxes, even if you did not realize you owed anything. If you are struggling to repay debts to IRS on top of your usual expenses, our team at The Law Office of Truman E. Coe, P.C. can help. Our Dallas IRS debt relief lawyers have over 40 years of combined legal experience and can help assess if your back taxes can be discharged through bankruptcy in addition to other debt forgiveness strategies.
What Happens If I Owe Money to the IRS?
Because the IRS is a government agency with federal powers, the consequences of owing a substantial amount of taxes can be wide-reaching and severe. Like a traditional lender, the IRS will typically attempt to collect the outstanding amount through basic collection actions. These can include letters or phone calls explaining what you owe. The communications will likely get more aggressive over time, especially as late fees and interest begins to pile up.
The IRS has unique punitive measures at its disposal for those who continue to fail to pay owed taxes. Remember, the longer you wait to address taxes owed to the IRS, the more fees and interest you will accumulate. Eventually, IRS may resort to mount to more extreme measures, especially if you have not been communicative.
Actions IRS can potentially take against you if you fail to repay owed taxes include:
- Place a federal tax lien on your property
- Seize your property outright
- Revoke your passport
- Garnish your wages
- Force you to forfeit any refunds
- Charge you with tax evasion
Even if you know you will not be able to pay taxes when they are due, you should always file for taxes on-time. Fees and penalties for failing to file your taxes at all are significantly harsher than a failure to pay. Furthermore, you will most likely not be able to discharge any taxes associated with the returns you do not file.
Discharging Tax Debt Through Bankruptcy
If you are at all familiar with bankruptcy, you probably know you can discharge certain types of debt upon successfully completing the process. Only unsecured debts – those not guaranteed by some sort of collateral – can typically be discharged, however. Tax debt exists in a sort of gray area and can only be discharged under certain conditions.
The reality is tax debt is one of the most difficult types of debt to absolve or discharge. It can be common to encounter advertisements overpromising what can be accomplished for individuals with large amounts tax debt, but our team will always be upfront and realistic about what legal tools will permit in your situation. The good news is many Texans do qualify to discharge some or all of their tax debt through bankruptcy, and our Dallas IRS debt relief attorneys can help determine if your debt is eligible.
There are two types of consumer bankruptcy: Chapter 7 and Chapter 13. Both permit you to discharge certain types of IRS debt once they are completed but have different rules and eligibility requirements for doing so.
Chapter 13 bankruptcy requires you to pay a court-approved monthly sum based on your disposable income. The proceeds partially repay your creditors, including in many cases a portion of your IRS debt. You may still be able to discharge some or all of your tax debt if it meets certain criteria (discussed below), but you will in the meantime need to pay a monthly, mandatory amount for a period of 3 to 5 years in order to do so.
Chapter 7 bankruptcy avoids the reorganized payment and instead features a liquidation process. This can sound scarier than it is: Thanks to the state of Texas’s generous exemption schedule, many individuals lose little to no assets to the liquidation process when working in cooperation with experienced legal representation. Unlike Chapter 13, you will not have to pay any additional amount to your creditors for the length of your Chapter 7 bankruptcy.
In order to file for Chapter 7 bankruptcy, you will have to qualify under the Texas Means Test. If your average income is lower than the average median income for your household size in the state of Texas, you automatically qualify. If your average income is higher, you will need to determine your disposable income by subtracting eligible living expenses from your monthly income. The resulting number, your disposable income, decides whether you can partially repay your debts under a Chapter 13 bankruptcy or if you instead qualify for Chapter 7.
What Type of Tax Debt Can Be Discharged Through Chapter 7 Bankruptcy?
Successfully completing your Chapter 7 bankruptcy will in most cases result in a court authorizing you to discharge unsecured debts. This typically includes things like credit card debt, medical bills, and personal loans.
Tax debt is often considered off-limits. However, there are specific circumstances in which you are permitted to discharge IRS debt upon completing a Chapter 7 bankruptcy.
To discharge tax debt following a successful Chapter 7 bankruptcy, the following must be true:
- The taxes being discharged are income taxes. Payroll taxes, fraud penalties, and other fines cannot be discharged. Only income tax can be discharged in a bankruptcy.
- You did not commit fraud or attempt to evade paying taxes. If you deliberately provided false information on your tax return, including providing a false name, social security number, or income amount, you will not be eligible to discharge tax debt.
- The tax debt must be at least three years old. You will only be able to discharge tax debt from tax returns from at least three years before you file for bankruptcy.
- You must have filed tax returns. In nearly all circumstances, you will not be able to discharge any tax debt associated with a return that was not filed on-time.
- You must pass the “240-day rule.” This rule is fairly literal: The IRS must have assessed the income taxes you are seeking to discharge a minimum of 240 days before any discharging can occur. Alternatively, you may be able to discharge qualifying debt if it has not been assessed yet.
If your income tax debt meets all of the above requirements, there is a good chance you will be able to discharge it upon completing your Chapter 7 bankruptcy. We can evaluate what you owe to the IRS and whether it is eligible for discharging. Our team can also guide you through Chapter 7 bankruptcy and make sure the court understands you intend to discharge qualifying IRS debt.
What Type of Tax Debt Can Be Discharged Via Chapter 13?
Discharging money owed to the IRS works a bit differently in a Chapter 13 bankruptcy. Like in Chapter 7 bankruptcy, however, you will only be permitted to discharge qualifying income taxes.
In a Chapter 13 bankruptcy, income taxes are categorized into “priority” or “nonpriority” taxes. Any income tax that meets the criteria described above – not the product of fraud, at least three years old, filed on a tax return, and passing the 240-day rule – it is considered nonpriority and is dischargeable.
If you have any income tax debt that does not meet the criteria, it is considered a priority tax. Priority taxes must be paid in full in a Chapter 13 bankruptcy, the amount of which will be reflected in your court-mandated monthly payment. Other types of taxes, including tax liens and recent property taxes, are also not dischargeable and will have to be repaid in full as part of your bankruptcy plan.
Filing for Chapter 13 bankruptcy can quickly become challenging if you owe a great amount of priority tax debt. Bankruptcy courts generally assess what a Chapter 13 filer can reasonably pay given their current disposable income, not the totality of their debt. Priority tax debt is exempted from this consideration and must be paid in full. Our team can assess IRS debt you are not confident you can discharge and advise on how it might impact a Chapter 13 bankruptcy.
Are There Any Alternatives to Bankruptcy?
There are situations where you may have accumulated tax debt and are unable to solve the problem through bankruptcy, such as scenarios where the bulk of what you owe to the IRS is not eligible for discharging. Though bankruptcy can be one of the most powerful tools in discharging qualifying income tax debt, there are alternatives available.
You may be tempted to explore the IRS’s Offer in Compromise (OIC) program, which creates a repayment plan that enables you to “compromise” and pay back less than what you actually owe. Depending on your disposable income, the IRS may request a lump sum payment or payments in monthly installments.
However, in order to qualify for OIC, you must not have an open bankruptcy filing. Though there can certainly be situations where participating in OIC may be more advantageous than pursuing Chapter 7 or Chapter 13 bankruptcy, remember that the IRS is looking to collect as much tax revenue as possible. They will not advise you to consider bankruptcy, even if it is the course of action that will better settle your debt. The agency is looking out for itself, not you.
Consult with our team at The Law Office of Truman E. Coe, P.C. before committing to OIC. We can review what you owe to the IRS and determine what course of action will most help you.
We Can Help You Discharge IRS Debt
Carrying a substantial amount of IRS debt can lead to significant, negative consequences. Our Dallas IRS debt relief lawyers can work with you to identify tax debt that may be eligible for relief. We can guide you through Chapter 7 or Chapter 13 bankruptcy and work to get qualifying debt discharged. Our team is empathetic to the stress inherent to owing money to the IRS, which is why we give every client the attention and respect their case deserves.