Your favorite long time clients, Tom and Martha Taxpayer, have fallen on hard times. Their business failed, Tom underwent a triple bypass and Martha had a nervous break down. They got behind on their income taxes big time while trying to hold things together. Sam Sludge, local IRS Revenue Officer, unsympathetic by nature or training, is breathing down their necks. The Taxpayers have been told that bankruptcy can't help them out of their tax problems and ask you for general guidance.
Bankruptcy is a widely misunderstood legal process for debt relief, including taxes.
And, it is sometimes possible to reduce tax bills in a Chapter 12 or 13 plan similar to an Offer in Compromise. We'll explain the two types in more detail. The only way any collector can overcome the automatic stay while your bankruptcy case is still active is to apply to the bankruptcy court. Judges rarely will lift a stay for the IRS, and then it must prove some kind of fraud is being perpetrated by the bankrupt taxpayer. The primary downside to Tom and Martha in filing bankruptcy is that it gives additional time for IRS to collect the debt.