Tax Liens in Bankruptcy:

Some older income taxes can be eliminated in bankruptcy. A number of factors must be taken into consideration to determine whether a particular tax debt can be eliminated, so a tax transcript should be examined and competent counsel consulted for any determination of whether a particular tax debt can be eliminated. Normally a fee will be charged for this determination.

A separate question is whether a lien filed for the taxes can be eliminated or released because of the bankruptcy. This depends on which type of bankruptcy is filed. If a chapter 13 is filed, the IRS will file a claim asserting how much of the tax debt is secured. It generally files the secured claim based on the amount of the lien filed, rather than on the equity in the assets (a good practice pointer is to call the IRS person who signed the claim and ask they amend their claim to have the secured claim correspond to the equity in schedules A and B; if they do not do so promptly, then an Objection should be filed). The amount of the secured taxes must be paid in full over the life of the plan with interest).  The amount of the secured taxes must be paid in full over the life of the plan with interest.

If a chapter 7 is filed, the client should be informed that the bankruptcy itself will not eliminate tax liens even if the tax debts are discharged. (One recent case from Indiana (United States v Webb, Case no 1:17-cv-00058-JPH-DML, 2020 U.S. Dist. LEXIS 168583 (S.D. Ind. 14 Sept 2020) even held that the IRS could reinstate a lien on tax debt that was discharged in bankruptcy after it had erroneously released it).  After the Discharge is entered, IRS’ Insolvency Unit typically releases the lien automatically. But no guarantees. If it does not, then the Insolvency Unit should be contacted to try to negotiate a release of the lien, which it will often do payment of as little as 10-15% of the equity in the assets.

Michael Barnett, Esq.
Michael Barnett, PA
506 N Armenia Ave.
Tampa, FL 33609-1703
813-879-3100