Chapter 7 and Federal Taxes

[HHM]

This is where I am a little confused. I assume that all of this means that if I declare BK and wipe out my tax debt, that the "the lean survives the BK" means that even if I am broke at the time of my BK that the IRS can collect ten years later IF I come into money or acquire assets?

I think I phrased that question a little unclear. So in other words, say I am broke and without assets at the time of my BK, the taxes are dismissed with my other personal debt. Now let's further assume that five years after the BK I am making good money, maybe I come into an inheritance at that time. Can the IRS still come after me?

Again this is all assuming I don't enter into the adversarial process of quasi-lean stripping you described.

It depends, if the underlying tax debt is dischargeable, then the lien WILL NOT attach to property acquired after the BK petition is filed. For dischargeable taxes, the lien only attaches to property that is part of your BK estate. Hence, the reason it is so important to do a Motion to Value or if all you have is misc household goods, a quick call to the IRS Insolvency division will usually yield a release of the lien. So, if you owe $50,000 in dischargeable taxes, and the IRS filed a lien, and your combined assets have a value of $10K (remember, exemptions don't apply), then you will emerge from BK still owing the IRS $10,000 even though the taxes are dischargeable.

However, if the taxes are non-dischargeable, the lien survives the BK and can go on to attach to future income and assets (up to the end of the statute of limitations, 10 years).

[NSH]

Oh wait, Federal Tax Liens

IRS DEBT IS TECHNICALLY SECURED DEBT.

This is where most BK attorney's drop the ball. By operation of law, the IRS has a lien on all property of the debtor whenever a tax liability is created, the govt. makes a demand for payment, and you don't pay. The lien exists regardless if the IRS files a Notice of Federal Tax Lien. All the Notice does is put the IRS in 1st place over certain creditors, but the lien exists and is created by statute.

Whether this is an issue for you depends on whether you have any assets. If you own a house, this tax lien becomes problematic. As with any lien, the lien survives the BK. Thus, if you owe $40K to the IRS and have $50K in home equity, the IRS can foreclose that lien after your BK discharge even if the underlying tax debt is dischargeable. However, at the same time, the value of the lien is established at the time of filing petition. Let me explain...

So, what can you do? In today's real estate market you can do a quasi lien strip. Lets say you owe the IRS $40k, but only have $5K in home equity at the time you file the petition (i.e. the equity is Fair market value - superior liens to IRS, i.e. your mortgages). You need to file a Motion to Determine Value of Lien with the BK court. This act starts an adversarial proceeding. The reason to do so is to establish the value of the IRS's lien. Take this one step further, if there is no value to the home, then the lien attaches to no value and you can extinguish the lien.

If you don't file that adversarial proceeding, you enter into a legal grey area. The IRS has a lien for the full amount of the tax liability, that lien survives the BK even though the underlying tax is discharged as to you personally. Thus, in that respect, the IRS debt is no different than a non-reaffirmed mortgage; you have discharged your "personal" responsibility to pay the debt, but your assets (i.e. home) remain liable. If you don't file the Adversarial in BK, you are not without hope, but you will create one complicated, difficult, and EXPENSIVE mess to clean up that few attorney's or tax professionals are equipped to handle.

This is where I am a little confused. I assume that all of this means that if I declare BK and wipe out my tax debt, that the "the lean survives the BK" means that even if I am broke at the time of my BK that the IRS can collect ten years later IF I come into money or acquire assets?

I think I phrased that question a little unclear. So in other words, say I am broke and without assets at the time of my BK, the taxes are dismissed with my other personal debt. Now let's further assume that five years after the BK I am making good money, maybe I come into an inheritance at that time. Can the IRS still come after me?

Again this is all assuming I don't enter into the adversarial process of quasi-lean stripping you described.

[iamprose]

I would put more than 5 stars on HHM's tax sticky if I could.. This one jus stopped me from proceeding to make a big BK 7 filing mistake. I read the Nolo Chapter 7 book twice and didn't see mention anywhere that exemptions do not apply for IRS taxes.
On July 5th 2009 10:03 AM "HHM" posted: "you still need to go through the process of valuing the IRS lien. Once the IRS files a tax lien, the taxes become secured debt. As with any secured debt, the lien survives the BK. If you have no assets (keep in mind, for IRS taxes, exemptions DO NOT APPLY), you would need to file a Motion to Value the IRS Tax Lien to establish that the lien has zero or very little value."
Thank you HHM for savin my bacon! I thought I understood what I was doing, but I have to figure out how to proceed now. If anyone knows if I can still exempt any home furnishings in NY, or how many, that would really help. Perhaps my spouse should file alone to not become entangled in my mess. Kudos again to HHM, keep up the GREAT work!

[ashleywatson]

//Chapter 7 knowledge is must to declare for the bankruptcy. I think attorney can help you to solve your case and to help in tax matter.

[biotechsolution]

don't worry about it if the lien was attached to the house, if you don't have the house anymore you don't have to worry. You can't value a lien in a Chapter 7, it's usually reserved for a chapter 13 because you'll the secured amount through your plan.

[kjg812]

I have a quick question I have read through this and I filed a ch 7 no asset case. Is there need to file a motion to detremine value on the IRS lien? They had one on my house but the house was foreclosed on.

[rick123]

Just found out that I may need to dismiss my Chapter 7. I believe I may have miss calcuated the time of when my income taxes can be included in the BK. Was trying to include both my 2005 and 2006 taxes. However, I filed a Chapter 13 in 3/09 (mainly to save our house from foreclosre) which got dismissed early 8/2009 because irs started an audit and they notified the trustee that I would be owing taxes. When the irs notifed the trustee, (they were not yet finished with the audit) went ahead and gave a huge number that would not make our repayment plan work so our 13 was dismissed without prejudice. IRS audit was finally finalized on 11/30/2009. Waited the 240 days from the new assessment, the 3 year rule date was met, and the 2 year rule date was met. What I didn't know was that there would be an additional 90 days added on to the 157 days I was in the previous bk to the 3 year look back rule. What I don't understand is why the 3 year look back rule applies when first no one knew that there would be taxes owed, (remember the tax return was filed on time), secondly the irs was never prevented from collecting the taxes because I was out of the previous bk before the audit was completed, and there 240 days from the time they assessed the new taxes was never in jeopardy. Does anyone have any ideas?

[rick123]

Was just wondering about a situation I have. I filed a chapter 13 (at the time to say our house from foreclosure) that was dismissed without prejudice 157 days after I filed. The reason for the dismissal was because shortly after filing the bk the irs notified us that they would be auditing our 2006 return. Therefore during this time and before our repayment plan was finalized the irs informed the trustee that we would owe additional taxes. This amount was still yet undetermined but they through a number out that completely destroyed our ability to include it in the repayment plan under a 13, and therefore we decided to dismiss. Once the irs assessed the new taxes which was more than two months after the 13 dismissal and more than 240 days before we filed a new Chapter 7, I have now learned that I may have filed the 7 to early. I am being told that the 3 year look back rule will now need to include the time I was in the previous bk plus 90 days. By adding these days to the look back rule my 2006 taxes just miss that deadline by less than 2 mos. When we filed for the first 13 bk we did not have any taxes owed nor was there anything included in the repayment plan, it wasn't until after the irs audit did we know that we would owe taxes. Therefore, because the irs was never actually stayed from their due process collection efforts, and we waited the 240 days from the new assessment, and the 3 year rule from date of filing was met. Do we still have to add the 157 days plus 90 days to the 3 year look back rule or can the just the 3 year rule apply?

[BarkingCat]

biotechsolution is correct. The lien will survive the chapter 7. You can certainly negotiate a release of the lien w/ IRS after your discharge, but that's a separate exercise and has nothing to do with the bankruptcy filing.

[BKorbust]

DISCHARGING IRS DEBT AND LIEN WILL THIS WORK?

I am aware that back income taxes can be discharged in BR if they meet the criteria (at least 3 years since were filed, etc.). I am confused however as to where the debts should be listed in my filing forms.

Some details on my case; I will be filing Chapter 7 BR - the IRS has Liens filed on me for the sums owed ($62,000)

Some specific questions;
1. On Schedule E - "Unsecured Priority Claims" there is a checkbox for "Taxes and Certain Other Debts Owed to Governmental Units" I need to check that box, correct?
2. Most of the information I have been reading says that back IRS taxes that meet the criteria should be listed in Schedule F - UNSECURED NONPRIORITY CLAIMS. Is that correct or should I list them in Schedule E - UNSECURED PRIORITY CLAIMS?
A bit confusing to say the least.

I have ordered my MFTRA-X reports from the IRS to fully document exactly when the various tax returns were filed. Here is my plan of action, please tell me if I am on the right track or not.

1. I receive documentation (MFTRA-X reports) from the IRS showing that the debts do meet the criteria for discharge.
2. I list the debt(s) in my BR petition (again - where exactly)?
3. I owe $189,000 on my home. Using the online real estate home appraisal sites, they show a market value of from $176,000 to $195,000. This would show me from 0 equity to a high of around $6,000 equity.
4. I pay for a professional appraisal of my property that shows somewhere between 0 equity and $6,000 in equity.
5. I now have documented proof from the IRS that all my back taxes are more than 3 years since filed, and I have a professional appraisal showing little or no equity in my home which is my ONLY asset.

Please correct me if I am wrong, but armed with a professional appraisal and proof that the various years of back taxes are dischargeable, I should be able to go to a BR attorney and for a nominal fee have him draw up the proper "Motion to Determine Value of Lien" to be filed with my BR which hopefully would strip all or nearly all of the Liens now filed against me (I am assuming that if my appraisal shows for example $6,000 in equity, the Liens would drop from the $62,000 now recorded to $6,000. Correct?)

Again, filing Chapter 7. Any problems you see in my plan? Thanks for your help!

I just wanted to give you a bump here. We're in similar boats on taxes. I have seen conflicting information on the web and would love to find the right answer on this.

[biotechsolution]

I'm pretty sure you can only do that in a Chapter 13. Even though the bankruptcy releases your obligation to the income tax, the lien still remains against any and all property you have before filing. This includes any 401k accounts you may have. I have seen the IRS levy a 401k account after a bankruptcy to collect on a lien.

[ValleYum]

@clickman

Do pay for an appraisal or CMA - the online real estate home appraisal sites are notorious for being off the mark. Our CMA (done by the area's short sale guru) was 20k less than Zillow, etc.

Good luck with the tax liens! I am sure someone will chime in with info for you.

[BKorbust]

I could be wrong but I thought you couldn't strip tax liens. Anyone?

[clickman]

DISCHARGING IRS DEBT AND LIEN WILL THIS WORK?

I am aware that back income taxes can be discharged in BR if they meet the criteria (at least 3 years since were filed, etc.). I am confused however as to where the debts should be listed in my filing forms.

Some details on my case; I will be filing Chapter 7 BR - the IRS has Liens filed on me for the sums owed ($62,000)

Some specific questions;
1. On Schedule E - "Unsecured Priority Claims" there is a checkbox for "Taxes and Certain Other Debts Owed to Governmental Units" I need to check that box, correct?
2. Most of the information I have been reading says that back IRS taxes that meet the criteria should be listed in Schedule F - UNSECURED NONPRIORITY CLAIMS. Is that correct or should I list them in Schedule E - UNSECURED PRIORITY CLAIMS?
A bit confusing to say the least.

I have ordered my MFTRA-X reports from the IRS to fully document exactly when the various tax returns were filed. Here is my plan of action, please tell me if I am on the right track or not.

1. I receive documentation (MFTRA-X reports) from the IRS showing that the debts do meet the criteria for discharge.
2. I list the debt(s) in my BR petition (again - where exactly)?
3. I owe $189,000 on my home. Using the online real estate home appraisal sites, they show a market value of from $176,000 to $195,000. This would show me from 0 equity to a high of around $6,000 equity.
4. I pay for a professional appraisal of my property that shows somewhere between 0 equity and $6,000 in equity.
5. I now have documented proof from the IRS that all my back taxes are more than 3 years since filed, and I have a professional appraisal showing little or no equity in my home which is my ONLY asset.

Please correct me if I am wrong, but armed with a professional appraisal and proof that the various years of back taxes are dischargeable, I should be able to go to a BR attorney and for a nominal fee have him draw up the proper "Motion to Determine Value of Lien" to be filed with my BR which hopefully would strip all or nearly all of the Liens now filed against me (I am assuming that if my appraisal shows for example $6,000 in equity, the Liens would drop from the $62,000 now recorded to $6,000. Correct?)

Again, filing Chapter 7. Any problems you see in my plan? Thanks for your help!

[wystanfi]

The information you share is really good.