Bankruptcy and the Collections Statute of Limitations

Question:
I have a federal tax from 2004 ($15,000). In 2005, I declared Chapter 7 bankruptcy. Unfortunately, my federal tax debt wasn't discharged, and after I spent a year in bankruptcy, I came out and the IRS was first to ask for their money. How long does the IRS have to collect on my tax debt?

Answer:
It's a great question. As I indicated in another post, bankruptcy might seem like an attractive option for taxpayers, but it rarely solves the problem. Recent bankruptcy laws have made discharge of tax debt near impossible to achieve. What I've seen happen again and again is this: A taxpayer has a tax debt (along with other debt), and he asks an attorney for advice. The attorney means well and tells the taxpayer that his tax debt can be discharged. The taxpayer files Chapter 7 or Chapter 13 bankruptcy and learns -- too late -- that the tax debt doesn't qualify for discharge.

What happens then? The taxpayer comes out of bankruptcy, and the IRS is standing there with an empty plate, asking for money owed.

Your question goes to how long the IRS has to collect on that tax debt. The Internal Revenue Code is clear on this point: The IRS has 10 years from date of assessment to collect an outstanding tax debt. At the end of the 10 year period, the debt simply goes away. The IRS can no longer it.

Unfortunately, bankruptcy has an unfortunate effect on the collection statute of limitations. When a taxpayer files bankruptcy, the IRS just adds the time spent in bankruptcy PLUS SIX MONTHS to the collection statute of limitations. In other words, if your tax debt isn't discharged in bankruptcy, you've just given the IRS at least an extra six months to collect from you.