Having Financial Trouble? One of my favorite myths about tax debt is that you can get rid of it in a Bankruptcy. Let me be honest with you. The IRS eats Bankruptcy attorneys for lunch. Bankruptcy attorneys are not familiar with the intricacies of the IRS. They may promise your tax debt will be discharged, and will even try to include it in your Bankruptcy...but unless you know the facts you're going to still owe the most powerful collection agency in the world. And I was always very patient; because I knew I would get that money.
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Exploding the Myth! I'm going to share my knowledge about Bankruptcy with you from my time with the IRS.
o You can not include any years filed less than 3 years ago. For example if you're filing Bankruptcy in 2007, then the last tax year you have debt from that you can include would be 2004. The taxes for that year had to have been filed on time, no extensions; and you had to have filed it. If the IRS filed the return for you then no dice.
o Interest and penalties continue to accrue during the length of the Bankruptcy. So if your Bankruptcy ends up getting denied (the official term is dismissed) you will still owe the original IRS debt plus interest and penalties!
o The time that you're in Bankruptcy extends the Statue of Limitations on your IRS tax debt. The Statute is the amount of time the IRS has to collect your debt. It's normally 10 years, but a Bankruptcy increases that time limit giving the IRS more time to get your money.
o If you have an IRS tax lien it stays on your credit for 10 years from the time it was placed regardless of whether your debt was settled. Even if we didn't get our money, we got their credit.
What would the Hit-man do? Since I've worked on the other side, helping those that are in tax debt...I recommend getting the assistance of a tax professional if you have any doubt about including the tax debt in a Bankruptcy. Besides, if your financial situation is so grave that you're filing Bankruptcy you may qualify for a lower settlement amount for your debt. Now you have the smoking gun...Use it!
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