In some situations, it may seem like a simple solution to just let a tax debt expire or to ask for it to be discharged. But are these even options? In most cases, no. However, it is important to understand the differences between tax discharge and tax expiration and whether either is possible for you.
What Is Tax Discharge?
A tax discharge means that the IRS will eliminate an individual’s tax debt. In very simple terms, discharge means the taxpayer no longer has to repay back taxes. Note that the IRS rarely discharges taxes as they prefer tax relief and payment plans to settle tax debt.
The most common reason for IRS tax discharge is bankruptcy, although not all tax debt qualifies under bankruptcy laws. You cannot discharge debts, including income taxes, in many situations.
Who Qualifies for Tax Discharge?
Discharging a tax debt in bankruptcy isn’t simple. In fact, it is impossible to do so if you have in any way evaded paying taxes as a result of deliberate dishonesty or you failed to report your income.
You may qualify for tax discharge in limited situations, including meeting all of the following requirements:
- You have an IRS tax debt. (Note: taxes like payroll taxes can’t be discharged.)
- This tax debt is 3 years old or older.
- You filed a return for this tax debt on time and more than 2 years before you filed for bankruptcy.
- IRS hasn’t assessed this tax debt or assessed it a minimum of 240 days before you filed for bankruptcy.
- You haven’t evaded taxes or filed a fraudulent return.
Does Tax Discharge Remove a Tax Lien?
Yes, if the IRS approves a tax discharge due to bankruptcy, they’ll remove associated tax liens. Before the lien is removed, however, the IRS may ask for signed approval from bankruptcy courts.
There are many times when removing tax liens is critical, such as when you wish to sell a property. In some cases, the IRS will agree to a remove a tax lien to allow the property to be sold without interference. This is true especially when the sale helps to settle your tax debt.
What Is Tax Expiration?
A second factor to consider is tax expiration. According to law, the IRS has 10 years to collect on a tax debt you owe. This is your Collection Statute Expiration Date or CSED. The 10 years starts from when the tax is assessed and you are a sent an IRS notice that you owe.
When you reach your CSED date, it is possible the IRS will eliminate your tax debt.
Keep in mind that there are many situations when the IRS will extend your Collection Statute Expiration Date. If you know that your debt is more than 10 years old and you have a new CSED, have the IRS verify why they adjusted your date and whether your debt will be eliminated at that time.
Be aware that ignoring tax debt, especially over 10 years, will lead to very aggressive IRS collection efforts. In addition to more penalties and interest you owe, the IRS can place tax liens on your property, garnish your wages and retirement, and levy your bank accounts.
Does Tax Expiration Remove a Tax Lien?
When you don’t pay a tax debt, you receive a series of IRS notices that demand payment. If you still don’t pay your taxes or make payment arrangements, the IRS can then place a tax lien on your property to secure the tax debt. At a minimum, this lien will stay on your property until your CSED date or you pay your tax debt in full.
Remember, if the IRS extends your Collection Statute Expiration Date, the tax lien will remain. The IRS may also modify the lien, and that change can extend your CSED too.
For those who wish to sell a property, verifying that a tax lien expired may be important. It is very common for this not to occur, and that this can mean the property owner must settle the tax debt to remove the lien before the property can legally change hands. To verify a property lien’s status, check your county’s property records.
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