Many people file for bankruptcy as a way of stopping legal action from creditors. However, if one of those creditors is the Internal Revenue Service, bankruptcy might not provide the protection needed. If you are considering filing for bankruptcy due to old taxes or threatened action from the IRS, here is what you need to know. 

Can a Bankruptcy Stop an Audit?

Automatic stays are granted after you file for bankruptcy. The stay keeps your creditors from taking legal action against, such as a foreclosure or repossession. However, if the IRS is in the process of conducting an audit, filing for bankruptcy might not help. 

The IRS can continue to review your tax returns and financial records to determine if you owe additional funds to the agency. What the bankruptcy filing can do for you is keep the agency from collecting until the bankruptcy is completed in the courts.  The stay period for the collections gives you time to gather the money to pay off the IRS or make a payment arrangement. 

Can Back Taxes Be Discharged?

Certain debts of yours are discharged when you file for bankruptcy. Debts, such as payday loans and medical bills, are considered unsecured because there is no collateral securing them. As a result, they are usually eligible to be removed when the bankruptcy completes. 

However, a federal tax debt might be left standing when the bankruptcy is completed. There are strict rules that govern whether or not a tax debt can be discharged, including

• The tax debt has to be income-based.
• The tax return had to be filed at least two years ago.
• You were not attempting to commit fraud or tax evasion.

There are additional requirements that need to be met. If you do not meet all of these requirements, it is likely that the debt is not discharged. If you filed for a Chapter 13, you can include the debts into your repayment plan.

Can the Trustee Take Your Refund?

A common misconception about bankruptcies is that the trustee can take your tax refund and apply it to your owed debts, including your back taxes. This is not necessarily true. In some jurisdictions, refunds that are the result of receiving an Earned Income Credit, or EIC, are not taken. It is not considered an income-based payment, which exempts it from seizure. You would be able to keep that portion of your refund.

Consult with a tax attorney like Wiesner & Frackowiak, LC to determine what other ways filing for bankruptcy can impact your situation.