16 Apr You may discharge unpaid income taxes in bankruptcy
Unpaid income taxes may be discharged in bankruptcy if certain requirements are met. Most people mistakenly believe that taxes are never dischargeable in a bankruptcy. This myth is absolutely wrong! Although there are certain criteria that must be met, bankruptcy relief is often the best way to solve a serious tax problem and stop IRS collection activity. The filing of a bankruptcy case automatically and immediately stays (stops) IRS bank account levies and wage garnishments, and enables the taxpayer to either obtain a discharge or reorganize his or her tax liabilities.
The IRS is not just any creditor because it has the ultimate power to do things other creditors cannot do. However, if you hire a lawyer before the situation gets worse, there are options and possible solutions available.
Each type of bankruptcy treats IRS tax debts differently. The two most common forms of bankruptcy in getting rid of or repaying IRS tax debts are Chapter 7 and Chapter 13.
Tax Debts in Chapter 7
To qualify for an income tax debt discharge, all of the following must be satisfied:
• The taxes are income-based. Income taxes are the only kind of debt that Chapter 7 is able to discharge. The tax debt must be for federal or state income taxes or taxes on gross receipts.
• The return was due at least three years ago. The taxes must be from a tax return that was due (including all valid extensions) at least three years before you filed for bankruptcy. For example, if taxes were disclosed in a 2005 income tax return for which extensions to file the return expired on October 15, 2006, the tax return due date test will be satisfied if the bankruptcy petition is filed after October 15, 2009.
• You filed the return at least two years ago. You must have filed the tax return at least two years before filing for bankruptcy (having the IRS file a substitute for return will not satisfy this requirement). To avoid additional objections from the taxing authority, you must make sure the return is properly signed, mailed, and sufficiently complete to be deemed a tax return. In continuing with the example above, if extensions to file the 2005 return expired on October 15, 2006, you filed the return on April 15, 2008, and you filed for bankruptcy on October 15, 2009, you won’t be able to discharge the debts. You will have satisfied the tax return due date test, but not the tax return filing date text. In this scenario, you must wait until two years after April 15, 2008, or until April 15, 2010, to file for bankruptcy.
• The taxes were assessed at least 240 days ago. The taxing authority must have assessed the tax (entered the liability on the taxing authority’s records) against you at least 240 days before you filed for bankruptcy. This time limit may be extended if there was an offer in compromise between the taxing authority and you or if you had previously filed for bankruptcy.
• No fraud or willful evasion. The tax return must not be fraudulent or frivolous and the you cannot be guilty of any intentional act of evading the tax laws. If you file a joint return, the taxing authority must prove that both you and your spouse committed an act of fraud related to the applicable return or willfully attempted to evade the tax in order for the court to deny the discharge of the tax debt.
• Tax liens. The IRS has not recorded a lien on your property for the tax assessment made. A Chapter 7 bankruptcy discharge of income taxes wipes out the personal obligation to pay the tax and prevents the taxing authority from going after your bank account or wages. However, tax liens, also known as secured taxes, will remain attached to your property. This rule applies only to tax liens recorded against your property before you file for bankruptcy. This means that although you might not be personally liable for the tax debt, you’ll have to pay the lien from any profits when you sell the property.
Tax Debts in Chapter 13
If you are not qualified to file for a Chapter 7 or have decided that Chapter 13 is your best option, non-dischargeable tax debts can be included in your repayment plan. In addition, bankruptcy’s automatic stay applies to the IRS as well, meaning all collection efforts pending against you will be stopped. Filing for Chapter 13 will also accomplish two other very important things:
1. Penalties that the IRS has tacked on your tax debt will be discharged, and
2. No new penalties or interest will accumulate while you are in Chapter 13.
In short, you may pay considerably less money to the IRS by going through bankruptcy than you would if had tried to work out a debt settlement agreement with them on your own.
Note: This is not a legal advice.