Can Filing for Bankruptcy Remove a Tax Lien?
Every year, thousands of Americans file for bankruptcy in a bid to wipe the slate clean and start anew. However, tax liens complicate this fresh start.
According to recent statistics, a significant portion of bankruptcy filers are grappling with tax-related debts. Studies indicate that over 50% of individuals filing for bankruptcy have some form of tax debt. Thus, highlighting the widespread nature of this issue
Keep reading as we discuss whether filing for bankruptcy can effectively remove a tax lien. This blog will also aim to help anyone considering bankruptcy as a potential solution to their financial woes.
Understanding Tax Liens
A tax lien is a tool used by the IRS to ensure payment of overdue taxes.
When you owe back taxes and fail to pay them, the IRS can place a lien on your assets. This can include financial accounts, future income, and other valuable assets.
Here are several reasons why this might occur:
Unpaid Income Taxes: If you fail to pay your unpaid taxes, the IRS can place a lien on your assets.
Unpaid Business Taxes: Businesses that owe payroll taxes or other business-related taxes can also be subject to tax liens.
Unfiled Tax Returns: If you haven’t filed your tax returns, the IRS can estimate your tax liability and assess a lien based on that estimate.
Once a tax lien is in place, it attaches to all your current and future assets until the lien is resolved. This means any income or assets you acquire while the lien is active becomes subject to the lien.
Consequences of Having a Tax Lien
The consequences of getting your assets placed under a lien can be far-reaching and complex. It impacts not just your present financial situation, but also your future financial prospects.
Listed below are the specific ways in which a tax lien can affect various aspects of your life:
Credit Score
A tax lien can drastically reduce your credit score. It appears on your credit report and signals to creditors that you are a high-risk borrower. This can make it difficult to secure loans or lines of credit.
Income and Financial Accounts
Federal tax liens can affect your ability to access financial accounts as they levy even your bank accounts. This means they can seize funds directly from your account to satisfy the tax debt.
Asset Seizure
In extreme cases, if the tax debt is not resolved, the IRS can seize your assets and sell them to satisfy the debt. This includes valuable items like vehicles, investment accounts, and other personal assets.
New Credit
Obtaining new credit can be difficult as lenders view tax liens as a significant risk factor. This can limit your ability to get mortgages, car loans, or even credit cards.
Criteria for Tax Debt Dischargeability in Bankruptcy
Filing for bankruptcy is a complex decision, particularly when dealing with tax liens. While bankruptcy can discharge certain debts, its effect on tax liens depends on the type of bankruptcy filed and the tax debt involved.
For tax debts to be discharged in bankruptcy, they must meet specific criteria:
Three-Year Rule: The tax return must have been due at least three years before the bankruptcy filing.
Two-Year Rule: The tax return must have been filed at least two years before the bankruptcy filing.
240-Day Rule: The tax assessment must have occurred at least 240 days before the bankruptcy filing.
No Fraud or Willful Evasion: The tax return must not be fraudulent, and the taxpayer must not be guilty of willful evasion.
If these criteria are met, the underlying tax debt can be discharged in bankruptcy. However, as previously mentioned, any pre-existing tax liens remain on the asset and must be resolved separately.
Can Filing for Bankruptcy Remove a Tax Lien?
Filing for bankruptcy can provide significant relief from various debts, but its impact on liens is more complex. While bankruptcy can discharge some tax debts, removing a lien involves additional considerations.
Here’s how bankruptcy affects tax liens:
Dischargeable Tax Debts
Certain tax debts may be dischargeable in bankruptcy if they meet specific criteria. For instance, the tax return must have been due:
at least three years before filing for bankruptcy,
filed at least two years before filing, and
assessed at least 240 days before filing.
Even if these criteria are met and the tax debt is discharged, the associated lien may still remain.
Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, the discharge of personal liability for tax debts does not remove the lien. The lien remains attached to any assets and must be paid off or settled for the lien to be removed from the property.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy allows for the reorganization of debts and the creation of a repayment plan. While the underlying tax debt can be paid off over time through the plan, tax liens remain on the property until the debt is fully paid or the lien is otherwise settled.
Survival of Tax Liens
Tax liens survive bankruptcy proceedings. This means that even after bankruptcy discharge, the IRS retains the right to enforce the lien against the property. The debtor must address the lien separately, typically by paying off the lien amount or negotiating with the IRS for a settlement and payment agreement.
Conclusion
While filing for bankruptcy can provide significant relief from various debts, it does not automatically remove delinquent taxes. Dischargeable tax debts can alleviate personal financial burdens, but tax liens remain attached until the debt is fully paid or settled.
Here at J. David Tax Law, we understand the intricacies of dealing with tax liens and bankruptcy. Our experienced attorneys are dedicated to providing legal advice to navigate these challenging situations with personalized strategies tailored to your unique circumstances.
Contact us today for a consultation to explore your options and take the first step toward resolving your tax issues.
Your Tax Relief Questions, Answered
Yes, you can negotiate a payment plan with the IRS even if you have a tax lien. The IRS offers various options such as an installment agreement. This allows you to pay your tax debt over time in manageable monthly payments. While the lien may remain in place until the debt is fully paid, setting up a payment plan can prevent further collection actions and show your commitment to resolving the debt.
Yes, but this is generally a last resort. The IRS has the authority to levy traditional IRAs, Roth IRAs, 401(k)s, and other retirement accounts if you have unpaid taxes and have not made arrangements to pay the debt. However, they must follow strict procedures before seizing retirement assets. It is often possible to negotiate a payment plan or other resolution to avoid this action.
Yes, there are penalties for not paying a tax lien. If a tax lien remains unpaid, the IRS can impose further financial penalties. This includes the interest on the outstanding debt, which continues to accrue until the debt is fully paid. In addition, the IRS can escalate collection efforts, potentially leading to a tax levy. Failure to address a tax lien can also severely damage your credit rating.
Yes, a tax lien can affect your employment, especially if you work in a field that requires a security clearance. Employers in these industries often conduct background checks that include a review of your credit history, where a tax lien would be visible. Having a tax lien might raise concerns about your reliability and trustworthiness. This can potentially affect your job prospects or current employment status.
Yes, it is possible to appeal a tax lien. If you believe a lien has been filed in error, you can request a Collection Due Process (CDP) hearing with the IRS Office of Appeals. During this hearing, you can present your case and provide evidence supporting your claim that the lien is incorrect or unjustified. It’s important to act quickly, as you generally have 30 days from the date of the lien notice to file for a CDP hearing.
