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When is Tax Debt Dischargeable in Bankruptcy?
Some types of tax debt can be discharged in a Chapter 7 bankruptcy, and a debtor may pay less than the full amount owed for some taxes in a Chapter 13 bankruptcy. The amount of tax relief that is available will depend on several  factors including:

  • The type of bankruptcy you are filing
  • If your tax debt is old enough to be discharged (explained in detail below)

How to Discharge Property From an IRS Tax Lien
The blanket IRS tax lien automatically applies to all of your property whenever you owe taxes to the IRS. This lien does not result in immediate collection of your tax debt like a bank account seizure or wage garnishment, but it does encumber your property, making it difficult to sell or refinance once the IRS files its Notice of Federal Tax Lien. If you need to sell your property or get rid of the lien, you need to request a discharge from the IRS.

How to Get a Tax Lien Discharged

Once the IRS records a lien, generally by filing it against your real property at the county recorder’s office, any subsequent purchaser takes the property subject to the lien. Since a buyer is not going to want to be responsible for your delinquent tax debt, you will likely need to negotiate a lien discharge before you can sell your home.

Exceptions to The Three-Year Statute of Limitations for IRS Tax Audits
The general rule of the IRS is to audit returns that have been filed in the last three years. Because of this, some taxpayers may breathe a sigh of relief once the three-year period has expired, but the rules regarding the statute of limitations are not quite that simple. There are circumstances where the IRS can go back even further to audit your return or assess additional tax, and the IRS has unlimited time to assess tax in the case of an unfiled return.

IRS Audits for Substantial Errors

If the IRS detects a substantial error on your return, the IRS can wait up to six years after your return was filed to conduct an audit. A substantial error involves an understatement of income of more than 25%, based on the income claimed on the return. Congress has extended this definition of a substantial error to include basis overstatements which result in less capital gains tax being owed after the sale of property. Some of those are discussed below.

How to Respond When the IRS Makes a Mistake
Charged with administering, enforcing, and collecting taxes from millions of Americans, the IRS understandably makes mistakes. If the IRS is trying to charge you penalties or assess taxes incorrectly, or is attempting to seize your bank account or put a lien on your house, you have options for disputing the IRS action and arguing your case.

How to Handle Incorrect Tax Assessments

If the IRS sends you a Notice of Deficiency and you do not believe you actually owe the tax, you should file a petition in Tax Court. You have 90 days from the date of the notice to file your petition. If you miss this chance, you will only be able to argue your case in court AFTER paying the full amount and filing a refund claim.

South Carolina Bank Involved in Employment Tax Fraud Scheme
The former Vice President of a South Carolina-based bank has pleaded guilty to conspiring to defraud the United States by participating in an employment tax fraud scheme that resulted in over $1 million in unpaid payroll taxes. This case shows that the Department of Justice will go after those who are complicit in employment tax fraud in addition to businesses or individuals that fail to remit payroll taxes.

Douglas Corriher made several loans to a bank customer who operated staffing companies in North Carolina. These loans were made through nominees to circumvent federal laws that limit the amount that can be loaned to a single entity. Engaging in illegal activities is one of the badges of tax fraud, so these illegal loans may have indicated to the IRS that an intentional violation of a known legal duty was occurring.

The staffing company handled the payroll responsibilities—including remitting payroll taxes and filing W-2 forms—for thousands of low-wage temp workers. The W-2 forms indicated that the employment taxes had been withheld from the workers’ wages, even though they had not actually been paid.

What is an IRS Summons?
An IRS summons is an official order to produce information or provide testimony to aid in an IRS investigation. Summonses may be issued to the taxpayer being investigated or to third parties who may have information that the IRS wants to use in the investigation. If you receive a summons, you should immediately consult with a tax litigation attorney to determine what information you are required to produce, what arguments you have for refusing to disclose certain information, and whether you may incriminate yourself by producing certain information.

Before you receive a summons, you should receive several other notices from the IRS, beginning with an Information Document Request (IDR). An IDR is a more informal notice, but will often be requesting the same information as the summons. The IRS would prefer that you respond and give them the information they want without requiring the issuance of an official summons, which can be enforced by a federal district court.

The IRS will have to prove to the court that the summons is necessary to obtain information that may be relevant to a legitimate investigation. The taxpayer will be asked to show why the summons is not proper, and a failure to respond to the summons after a district court orders it enforced will usually result in a citation for contempt which can include time in jail.

What is IRS Tax Lien Subordination?
Once the IRS files a federal tax lien, all other creditors or potential buyers have notice of the lien.  If someone buys your home, they will be buying the home subject to the lien unless you are able to negotiate a lien discharge. If you attempt to refinance your home, you will run into difficulties because the lender will not want their lien to be in a junior position to the IRS tax lien.

The general rule for lien priority is “first in time, first in right”, so if your first mortgage was recorded prior to the recording of the IRS tax lien, the first mortgage lender retains their priority. However, if the loan were refinanced, the lender would lose priority and fall behind the IRS if the home was foreclosed upon and the funds were disbursed to lienholders.

The IRS could give up its priority—which is known as tax lien subordination—which would allow the new lender to take a senior position to the IRS lien. Unfortunately, the IRS is not going to make such a gesture out of goodwill alone. They are only going to subordinate their lien interest if you have something to offer them, which usually takes one of two forms.

Can I Sell My Home Subject to a Federal Tax Lien?
Shortly after you fail to comply with an official demand for payment of your tax debt from the IRS, a secret lien attaches to all of your real property and personal property. However, the IRS can also file an official notice of federal tax lien on your home, and other property at the county recorder’s office, which puts the public on notice of the tax lien. This can seriously interfere with your ability to sell your home because any buyer would have to take the home subject to the lien.

However, the IRS will remove the lien—known as a lien discharge—in certain situations. By removing the lien, the IRS is giving up its right to this specific piece of property, which can be assigned a specific monetary value. The IRS will generally only give up this right if it receives something of equal value, or if there is sufficient equity in your other assets to convince the IRS that it will be able to get the money from your other assets.

For example, if you want to sell your home for $400,000, and you owe $300,000 on the first mortgage, the IRS has a lien interest of $100,000 on your home. If you want the IRS to give up this interest, you will have to either give $100,000 in value or show that you have other assets satisfactory to the IRS that will satisfy their claim.