IRS Means Never Having to Say….Anything
The IRS is not like most creditors. (Your probably knew that.) The IRS in bankruptcy is not like most creditors in bankruptcy, either.
Knowing what debts have been cleared (discharged) by your bankruptcy is easy for most debts. For credit cards, loans (including payday loans, who want you to think they are somebody special), car loans, medicals. When those debts are properly listed (scheduled) in the bankruptcy, they are automatically discharged, unless they object.
So, for example, Capital One. Was your Capital One card listed on the schedule of debts? (Schedule F.) Yes. Did they object? No. Then they are discharged.
That’s NOT the rule for the IRS in bankruptcy.
IRS and Bankruptcy: Not Like Other Debts
IRS in bankruptcy is not like other creditors.
First of all, not all income tax debts can be discharged. (Some people assume none can be, but you know better than that.) The main rule is you can discharge taxes that were due more than three years ago, and were properly filed. See 11 USC § 523(a)(1).
More than Three Years—Look at the Calendar
The due date for taxes is usually April 15, unless there was a holiday, or you asked for an extension, or because of some natural disaster (Covid-19 in 2020) there was an automatic extension. 523(a)(1).
That you can figure out for yourself, usually. (There are other rules on timing that do apply. This is NOT a complete analysis.)
Properly Filed—Lots of Gray Area
I say “properly filed” but that’s not the wording in the law. It’s my shorthand.
Your taxes do have to be filed, by you. (When people are chronically late, the IRS will often look at the W-2’s, estimate a tax and send you a bill. That does NOT count as filing a return for bankruptcy purposes).
You can’t file a fraudulent return. And you can’t willfully attempt[ed] in any manner to evade or defeat such tax.
That gray area is enough to give anyone who owes taxes some worry about what the IRS will do. You might feel certain you don’t pay because you were broke, but worry the IRS says you were evading.
I Got My Discharge. Am I OK?
The IRS does NOT have to say. The IRS does NOT have to tell the bankruptcy court, or you, if they say you filed a fraudulent return or willfully attempted to evade. They can decide whenever they want that they think you’re an evader. You find out when you get collection notices again.
Should we ask the bankruptcy judge to decide?
Instead of waiting to see what they do, we can force the IRS to explain their position to the bankruptcy judge. Experts in that field say that’s a bad idea. A lot of times the IRS will let something borderline slide, but if you bring in the judge, they will fight you. (At least that was the consensus at the NACBA convention panel in May 2021.)
Is There Anything I Should Do?
Actually there is. You should get your account transcript and look at the IRS notes. You can see if they have your debt coded as discharged in bankruptcy. Or are they showing something else. You can get your transcripts here.
Get your tax account transcript. The IRS has several different transcripts, For what we are talking about, the tax account transcript is the one you want.
What If There’s an IRS and Bankruptcy Problem?
So at the end of your bankruptcy, there might still be a problem. The IRS might claim a tax is still there that we think should be discharged. Going back to fight that in front of the bankruptcy judge can be way harder and more expensive than the bankruptcy itself.