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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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We were audited for 2005. The audit resulted in a 25,000 assessment,

Customer Question

We were audited for 2005. The audit resulted in a 25,000 assessment, plus an additional 9,500 in penalties and interest. Assessment was 12/03/07. Our income has dropped dramatically (2008) and we are currently under "temporary uncollectible" status. We are under water in our house and have no idea when we could ever pay this back tax, let alone our other debts. I just received "Notice of Federal Tax Lien" for the assessment balance-4/21/09. My attorney has advised us to file bankruptcy - - my question is, by filing bankruptcy (chapter 7) would this discharge the tax assessment and release the lien? Also, is this a preview of what's to come (our bank account, business receivables, etc.?) Maybe important to know, we did not deliberately mislead on tax return, our CPA firm made error, we filed a claim on E&O, received penalties and interest settlement - 1/3 to attorney, 2/3 to IRS.
Submitted: 8 years ago.
Category: Tax
Expert:  Ed Johnson replied 8 years ago.

Dear SydVin,


IN general chapter 7 bankruptsy can discharge irs taxes under the following conditions.


You can discharge (wipe out) debts for federal income taxes in Chapter 7 bankruptcy only if all of the following conditions are true:

  • The taxes are income taxes. Taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy.
  • You did not commit fraud or willful evasion. If you filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes, such as using a false Social Security number on your tax return, bankruptcy can't help.
  • The debt is at least three years old. To eliminate a tax debt, the tax return must have been originally due at least three years before you filed for bankruptcy.
  • You filed a tax return. You must have filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy.
  • You pass the "240-day rule." The income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet. (This time limit may be extended if the IRS suspended collection activity because of an offer in compromise or a previous bankruptcy filing.)

You can not discharge a Federal Tax Lien.


So while your personal obligation to pay the tax may be eliminated, if hte lien is already recorded, it remains on the record. So even though the IRS can not pursue you for it, it remains on the record, until it is paid.


So when and if you sell the property on which the lien is attached recorded, the tax lien is paid first.


Since you already have an attorney, I assume he is a tax attorney. Please ask him about the following form:


You are entitled to a due process or equivalent hearing.

Ed Johnson and other Tax Specialists are ready to help you
Customer: replied 8 years ago.
My Tax Attorney responded by saying " I thought there was already a lien" If that were true, why would he recommend bankruptcy if it doesn't discharge the debt, officially, or release the lien?? Also, should this lien have been filed since we were finally granted the "currently uncollectable" status?? Will they next file Levy??
Expert:  Ed Johnson replied 8 years ago.

If there was already a lien you could still file for the hearing, even though it is intended to be filed for before the lien. BUT, if after the lien you would request an equivalent hearing.


If it is collectible the IRS can periodically review the condition and it can be moved, though this does not happen often, to a collectible status.


They may next file for levy.


The lien can be filed even though the debt is considered at the moment in collectible status. You or your attorney should have been provided a notice of collectible status that also should have stated that a lien may be filed;


If form 53 was not included, then the lien will not be suppressed.


However you can file the following for requesting the lien be withdrawn:


I can not say if they will move to levy. That is a decision made by the person having control of your case.