If you have back taxes or even an Internal Revenue Service lien, you are not barred from filing for bankruptcy. In fact, parts of the U.S. Bankruptcy code deal specifically with taxes. If you hold an IRS lien, however, there’s a good chance the lien will still be waiting for you when your bankruptcy case is finalized. The code is designed to force you to pay the lien, whether you’re in bankruptcy or not.
Back Taxes and Liens
If you’re preparing to file bankruptcy, it’s important to note the difference between back taxes and liens. Back taxes are considered the money you owe to the government in taxes not paid. You don’t have to have a lien to have back taxes, and these back taxes could be as simple as a shortfall of $100 of a federal income tax return three years ago. A lien results when the IRS attaches your tax debt to your property, usually your house, as a way of securing the debt. It also gives the IRS the legal right to your property, and is sometimes a precursor to selling the home to satisfy the debt.
How Liens Happen
The IRS periodically reviews tax liabilities; if you have one, you’ll receive what is called a Notice and Demand for Payment. This will tell you what you owe. If you either ignore this letter, or talk to the IRS but cannot fully repay what you owe, within 10 days of receiving the letter, this can trigger a lien. The lien doesn’t start right away, however. For the lien to be valid, the IRS must file the motion according to your state’s property laws. For example, in California, the IRS would file the motion with your county tax clerk.
A Lien’s Validity in Bankruptcy
A federal tax lien is valid only if it was filed before you filed for bankruptcy. When a lien is created, the federal bankruptcy code recognizes this as secured debt, meaning it’s treated the same as debt with collateral in bankruptcy. Even in bankruptcy, the lien will not go away. The IRS’s lien is given a high priority in both Chapter 7 and Chapter 13 proceedings. Even if you go through Chapter 7–which wipes out all your debts–the lien does not go away.
Paying Liens in Bankruptcy
Because federal tax liens are considered secured debt and receive priority in bankruptcy, it’s likely you’ll be paying at least some, if not all, of it back. In Chapter 7, this likely means the sale of real property such as your home and other assets to satisfy the lien. In Chapter 13, where you repay some part of what you owe your creditors, the bankruptcy trustee must make every attempt to create a plan that pays back your priority claims in full, which can include the lien. Once the plan is finalized, the IRS is bound to it, even if it does not receive full payment.
While the bankruptcy code can help you discharge back taxes, it can provide little help for IRS liens. Liens are designed to get the debtor to repay, no matter the circumstances. The only way to be rid of a lien is to repay the money owed, whether you’re going through bankruptcy or not. There are ways to appeal and get rid of the lien, but these are usually due to procedural circumstances. An attorney who specializes in bankruptcy or tax law can tell you if you the IRS violated your rights or its procedures during the lien process.
Call the Law Office of Gregory A. Ross, PC
Call us at 940-692-7800, or email at email@example.com to discuss your options.