Jeffery J. Sattler
November, 2017

We’re from Bankruptcy and We REALLY are Here to Help: Tax Relief via the Bankruptcy Code

            Debtors can be overcome by a feeling of helplessness arising from the IRS’s unrelenting enforcement of seemingly insurmountable and still ever-increasing tax debt.  At times, they literally look like deer caught in the headlights with the IRS bearing down on them.  This is not to denote disrespect for the taxing authority or the invaluable service it provides to our country.  Nevertheless, debtors in such situations can hardly be blamed for scoffing at the old IRS adage, “We’re from the government and we’re here to help.”  Unbeknownst to many is that debtors often are not as hopeless as they might feel, and that the Bankruptcy Code offers them an opportunity for truly a fresh start.

            Vetting debtors for bankruptcy is admittedly arduous; each debtor and each of the accumulated tax debts must undergo its own scrutiny.  Navigating the Internal Revenue Code and Bankruptcy Code simultaneously is no easy task either, and is subject to asterisks and caveats galore.  With that said, bankruptcy practitioners are armed with the knowledge and know-how to piece together results that can give rise to the new day that debtors never dreamt possible.

            The gamut of potential benefits that such knowledge and know-how can produce depends upon the appropriate chapter in which the bankruptcy is filed.  For instance, the benefits in chapter 11 proceedings include, but are not limited to –

  • Simply having the IRS stand-down from assessing and collecting delinquent taxes (the automatic stay applies to the IRS just like other creditors);[1]
  • Possibly also enjoining the IRS from taking such action against related non-debtors (some courts find that § 105(a) of the Bankruptcy Code trumps the so-called “Anti-Injunction Act” (§ 7421(a)) of the Internal Revenue Code and stays collection against a business-debtor’s principals);[2]
  • Avoiding unperfected IRS liens (debtors’ avoidance powers against unperfected liens are effective against the IRS too);[3]
  • Discharging the IRS’s old unsecured debt (certain tax debts arising more than three years before bankruptcy are just as susceptible to discharge as other general unsecured debt);[4]
  • Spreading payment of the IRS’s old secured debt over more than five years (certain secured tax debts arising more than three years before bankruptcy can be spread over the life of a bankruptcy plan);[5]
  • Spreading payment of the IRS’s more recent debt, regardless of whether unsecured or secured, up to five years (certain tax debts incurred within three years prior to bankruptcy can be spread over five years of a plan);[6] and
  • Utilizing balloon payments to pay off the IRS (chapter 11 does not require equal monthly payments and permits balloon payments at the end of a plan).[7]

And, these are just general examples.

            Important to recognize is that bankruptcy is not a panacea for all debtors and their tax woes.  For some, tax attorneys and their expertise remain debtors’ best means of survival.  Bankruptcy and tax attorneys frequently come together to determine which can provide the greatest relief in the most affordable manner.  Such relief can also come by way of their combined efforts.  For instance, a chapter 7 bankruptcy filing either before or after a tax attorney’s submission of an offer-in-compromise can sometimes be the best course of action for debtors, and draw benefits from both the Bankruptcy Code and Internal Revenue Code.

            Making use of the Bankruptcy Code in these and other fashions to cope with irrepressible tax debt is not an affront to the Internal Revenue Code or the work of the IRS.  Instead, it is exactly how Congress intended the Bankruptcy Code to work[8] - Bankruptcy really is here to help.

[1] See Hudson v. IRS (In re Hudson), 168 B.R. 449, 451-52 (Bankr. S.D. Ga. 1994) (“The stay of 11 U.S.C. § 362(a) applies to the conduct of the IRS.”).

[2] See Condado Rest. Grp. Inc. v. IRS (In re Condado Rest. Grp. Inc.), 2017 Bankr. LEXIS 1517, at *5 (Bankr. D.P.R. 2017).

[3] See Bakst v. Lifestyle Tree Maintenance Landscape Serv. (In re HDI Partners), 202 B.R. 524, 528 (Bankr. S.D. Fla. 1996) (“under [11 U.S.C.] § 544, the Trustee may avoid the IRS’s unperfected tax lien”) (citations omitted).

[4] See Boykin v. Miss. Dep’t of Revenue (In re Boykin), 2016 Bankr. LEXIS 1955, at *14 (Bankr. S.D. Miss. 2016) (“The purpose of [11 U.S.C.] § 523(a)(1)(A) and § 507(a)(8)(A) is to render . . . certain old or ‘stale’ tax claims dischargeable.”).

[5] Cf. 11 U.S.C. § 1129(a)(9)(D) (allowing secured tax claims arising within three years before bankruptcy to be paid via regular periodic payments over five years).

[6] See § 1129(a)(9)(C) and (D).

[7] See In re Jerath Hospitality, LLC, 484 B.R. 245, 247 (Bankr. S.D. Ga. 2012) (“Congress actually considered amending § 1129(a)(9) to expressly prohibit balloon payments to tax claimants; however, this legislation was never adopted.”) (citation omitted).

[8] Cf. United States v. Conston, Inc. (In re Conston, Inc.), 181 B.R. 769, 770, 780 (D. Del. 1995) (discussing the interplay of the Bankruptcy Code and Internal Revenue Code and “the carefully crafted Congressional balance between taxpayers, the government, and the creditors”).