Bankruptcy and Taxes

Bankruptcy and Taxes

In most cases, you are still liable for tax debt following bankruptcy proceedings. However, bankruptcy law allows the discharge, or elimination, of tax debt in some circumstances.

What Can be Discharged?

Whether you can discharge tax debt will depend on the type of tax, how old the tax debt is, if you filed a tax return, as well as other factors. Federal and state taxes may be dischargeable, but a complete determination cannot be made without looking at several factors. The list below details some of the factors. However, it is important to understand that each individual’s circumstances must be reviewed to determine if a tax liability may be discharged through bankruptcy.

  • The discharge is for personal income taxes only. Payroll taxes, sales taxes and other non-personal income taxes are generally non-dischargeable.
  • You must have filed a legitimate tax return on time, or filed late at least two years prior to the filing of a bankruptcy.
  • The tax liability is at least three years old, meaning the tax debt is from a tax return that was originally due at least three years before filing bankruptcy.
  • The IRS or state taxing authoring must not have assessed the tax debt within 240 days before the debtor filed for bankruptcy. If the IRS or state taxing authority suspended collection activity during negotiation, the applicable date may be extended.
  • You did not commit willful tax evasion. Possible evasive actions include changing your Social Security Number, your name, or the spelling of your name, repeated failure to pay taxes, filing a blank or incomplete tax return, or withdrawing cash from a bank account and hiding it.
  • The return contains no information that was intended to defraud the IRS or state taxing authority.

Penalties on taxes that are dischargeable are also eligible for discharge. Once the discharge of tax liability is complete, you are no longer responsible for paying the taxes, and the IRS or state taxing authority may not garnish your wages and/or bank accounts.

Federal Tax Liens

In some cases, the IRS or state taxing authority will place a tax lien on your home or other property prior to a bankruptcy case. Even if a discharge of tax debt occurs during a bankruptcy case occurs, the lien will remain enforceable after the discharge. Therefore, you would have to pay off the lien before selling your home or property that is subject to the lien.

Tax Debt Not Eligible for Discharge

The following types of tax debt cannot be discharged:

  • Tax penalties and interest from tax debt that is ineligible to be discharged
  • Tax debts from unfiled tax returns or resulting from fraudulent returns or conduct
  • Trust fund taxes (i.e. sales taxes, employee income taxes withheld, etc.)

What if I can’t discharge taxes in bankruptcy?

If you are unable to discharge tax debt under Chapter 7, you may consider these alternatives:

File a Chapter 13 Bankruptcy.

By filing a Chapter 13 bankruptcy you may be able to pay your taxes over a period of 3-5 years, with the ability to stop collection efforts of the IRS or state taxing authorities, stop all new assessments of penalties once the case is filed, and still be eligible to receive funds for future years in a payment plan.

Alternatives to bankruptcy:

Other arrangements, such as entering into an installment agreement, or making an offer in compromise, which could result in the settlement of the tax debt for less than the amount owed is an alternative option to filing bankruptcy.

The Law Office of Brian R. Lewis is experienced in handling personal bankruptcy and business bankruptcy with both state and federal tax issues. Call us today and we can answer any questions you have.

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