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Does Bankruptcy Discharge a Tax Lien?

Does Bankruptcy Discharge a Tax Lien?

A bankruptcy can eliminate certain types of tax debts, but it does not remove a federal tax lien. If a Notice of Federal Tax Lien has been filed against your property, it can complicate your bankruptcy case. You should talk to a tax attorney before filing for bankruptcy in these situations.

Notice of Federal Tax Lien

The first issue you need to determine is whether a Notice of Federal Tax Lien (or a state tax lien) was filed before your claimed bankruptcy. The lien must have been filed with the appropriate local authority, such as a county recorder’s office. If not, the automatic stay in bankruptcy will prevent the filing of any liens.

The IRS typically decides whether to file a Notice of Federal Tax Lien once a taxpayer’s debt exceeds a certain amount, unless a specific type of installment agreement has been negotiated prior to the filing of the lien notice.

Dischargeability of Tax Debt

Regardless of whether the lien has been filed, there are other rules that affect the dischargeability of tax debt. Your tax debt must generally be for a return due more than three years ago and the return must have actually been filed more than three years ago. There are other conditions that could also impact your ability to discharge your tax debt in bankruptcy.

If your tax debt isn’t dischargeable, you may want to find out whether you are eligible for other tax resolution options, such as an installment agreement or Offer in Compromise.

Value of the Tax Lien

Assuming your tax debt is otherwise dischargeable and the tax lien notice was properly filed, the lien still needs to attach to property with some value. The lien is only worth the fair market value of the property it attaches to after any other liens with higher priority have been paid.

For example, if you owe more on your mortgage than the value of your home, the federal tax lien interest on your home will be worthless. This could make it easier for you to discharge your tax debt.

Many Chapter 7 bankruptcy cases are “no-asset” cases, where the debtor is not required to liquidate any of their assets and still receive a discharge of their debts. However, the debtor may actually have some assets, but these assets are protected from liquidation due to bankruptcy exemption laws.

It’s important to note that the IRS does not need to follow the bankruptcy exemption laws. Property that is exempt from liquidation in bankruptcy may still be subject to the IRS tax lien and remind so after your bankruptcy is completed.

If you are considering bankruptcy to discharge tax debt or have federal tax lien issues, consult with a tax attorney.

Contact The Gartzman Law Firm to speak with an Atlanta tax lien attorney about your case. Request your consultation by calling (770) 939-7710.