Tax debt issues might be best solved by tax appeals

When it comes to options for debt management, the immediate goal may be relief from creditors. If payments become unmanageable and collection tactics become too aggressive, some may consider bankruptcy.

Yet a recent article reminds New York readers that they need to understand how any outstanding or disputed federal tax liabilities may survive a bankruptcy filing before considering this approach to debt relief. As a preliminary matter, if a taxpayer’s return has been audited, the bankruptcy filing will not halt that investigation. In addition, a Chapter 7 bankruptcy will not discharge a recorded federal tax lien.

For example, if an audit results in an outstanding tax liability, the Internal Revenue Service may file a tax lien against the taxpayer after give ten days’ notice in person, on the telephone, or by mailing to the taxpayer’s last known address. A taxpayer does have the option of disputing the tax liability by requesting a Collection Due Process hearing under Section 6320 of the Internal Revenue Code. However, that CDP hearing may be difficult to attend to amidst the obligations of a bankruptcy filing.

A tax attorney might also caution that bankruptcy may not provide debt relief because many types of tax are non-dischargeable in a Chapter 7 bankruptcy. Specifically, taxes other than income are generally not dischargeable, and even income taxes relating to tax years within three years of the bankruptcy filing will pass through.

What this post illustrates is that administrative appeal options with the IRS may be preferable to a bankruptcy filing, especially if a taxpayer has the assistance of an experienced tax attorney. Although an attorney cannot guarantee outcomes, he or she might provide invaluable assistance.