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To address your back tax concerns, contact our law firm today to meet with a highly skilled business bankruptcy lawyer. We can help you find the best solution and take decisive action to regain your financial footing.
We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.
Can Irs Debt Be Discharged In Chapter 13
Some clients have to file Chapter 13. Since the IRS debt is dischargeable: the amount to be repaid can be small maybe 10% or less.
Interest And Penalties
Chapter 7: If the tax will be discharged so will the Interest and Penalties.
Chapter 13: Penalties are general unsecured debt. Thus that part may be repaid at a low dividend Interest stops in Chapter 13.
May An Employer Terminate A Debtor’s Employment Solely Because The Person Was A Debtor Or Failed To Pay A Discharged Debt
The law provides express prohibitions against discriminatory treatment of debtors by both governmental units and private employers. A governmental unit or private employer may not discriminate against a person solely because the person was a debtor, was insolvent before or during the case, or has not paid a debt that was discharged in the case. The law prohibits the following forms of governmental discrimination: terminating an employee discriminating with respect to hiring or denying, revoking, suspending, or declining to renew a license, franchise, or similar privilege. A private employer may not discriminate with respect to employment if the discrimination is based solely upon the bankruptcy filing.
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Business Taxes In Bankruptcy
Income taxes that you incur personally as a result of operating a business are dischargeable in bankruptcy under the 3-2-240 rules. However, different rules apply to other business-related taxes:
Payroll Trust Fund Taxes. Trust fund taxes are not dischargeable in bankruptcy. Trust fund taxes include payroll taxes that employer withholds from an employee’s pay on behalf of the government. If you fail to withhold required taxes or withhold the taxes from an employee’s check but fail to pay the withheld funds to the taxing authority, the taxes are not dischargeable.
Employer’s Portion of the Payroll Tax. The employer’s part of the payroll tax is dischargeable in bankruptcy under rules similar to the 3-2-240 rules. The debtor must file for bankruptcy a minimum of three years from the date that the IRS 941 form was due and two years from the date the debtor filed the tax forms.
Sales Tax. Like other trust fund taxes, sales taxes are not dischargeable in bankruptcy in Pennsylvania.
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How Can I Eliminate Tax Debts In Bankruptcy
One of the things that people hear about bankruptcy is that it usually doesnt discharge some debts owed to the government, like taxes. Even if you have a large burden of tax debt that is making it extremely difficult to reconcile your finances, bankruptcy cant always help. However, here is some good news: You actually can eliminate and/or get some immediate relief from some tax debts in bankruptcy under certain circumstances.
What If The Taxes Are Not Dischargeable Or What If The Tax Lien Cant Be Avoided
In Chapter 13 the taxes can be repaid over 5 years. And, it puts a halt to further interest and penalties.
Disclaimer: Blogs on legal matters are for information purposes only and is not to be construed as legal advice.
For more information on IRS Debts, call today.
Please see our blog: IRS Tax Liens and Bankruptcy Also learn more about IRS levies, Federal tax liens, Settle IRS tax Debt, How to cut your IRS Debt, IRS Settlement and IRS payment plan.
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Is Discharging Taxes In Bankruptcy Possible
Yes, it is possible to discharge taxes in bankruptcy. But, you have to have an in depth understanding of both the internal revenue code and the bankruptcy code rules and regulations. Generally speaking you can discharge income taxes in bankruptcy if the bankruptcy petition filing date is over three years after the due date of the income tax return including extensions. That the bankruptcy petition is filed two years after the actual filing date. And, that the bankruptcy petition filing date has to be over 240 days after the assessment date.
Those rules can be tolled, which means that they are not running for a myriad of reasons such as collections due process appeal, if you are out of the country for an extended period of time, or other appeals such as an or a discharge in bankruptcy petition itself. So, there are all sorts of ways for the IRS to toll those statutes of limitations.
The Relationship Between Bankruptcy And Taxes
Most people don’t realize the different between chapter 7 and chapter 13 bankruptcy.
A chapter 7 bankruptcy is a theoretical one moment in time bankruptcy. Everything is looked at based on how it existed on the date that the bankruptcy was filed. The things that go into it will take time, for instance, it will take 3 months in order to do a creditors meeting, it will take 2-3 months in order to get a final discharge, but theoretically it’s a one moment in time discharge. If the taxes were dischargeable at the moment when you filed the bankruptcy petition, then they are dischargeable, if they were not, then they are not dischargeable. You just have to run the 2 year, 3 year and 240 analysis on them.
A chapter 13 bankruptcy is generally a 5 year plan, sometimes it can be a 3 year plan or shorter, sometimes it can even be a 7 year plan, but generally it is a 5 year plan to pay off all of your creditors including all of the non-dischargeable tax liabilities and unsecured creditors over that period of time.
Chapter 7 is a much better situation than a chapter 13, but for a lot of people chapter 7 is not an option because they are making too much money or do not comply with the means test. There is a means test that they have to go through to determine if the court will kick them out of a chapter 7 and move them into a chapter 13 which means it will be a 5 year plan. So, you don’t really want to do a chapter 13 unless it’s your only option because you don’t pass the means test.
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What Should The Struggling Business Owner Do
Entrepreneurs are forever optimistic that they will turn the corner and start making money.
To the entrepreneur, it often seems like a good idea to delay paying these types of taxes, and to pay current expenses like bank loans, suppliers, or employee salaries instead.
The first thing to do if you dont have enough cash flow and operating capital to cover your expenses is to talk to a lawyer about the best way to go forward.
You are at a point where one decision could make the difference between:
- Walking away from your business and start again
- Paying thousands of dollars of taxes, penalties, and interests on these two types of taxes
If all is lost and you already owe sales taxes and withholding taxes, and you do not have the money to pay the taxes off, then you have two options left.
1. Wait until the statute of limitations ends which can take 10 to 15 years or even longer
2. Pursue an offer in compromise with the IRS which will only work on the withholding taxes, not any state sales taxes
Withholding Taxes Cannot Be Discharged In Bankruptcy
If you file a Chapter 7 bankruptcy case, any withholding taxes you owe will not get legally written off . Older personal income taxes that meet certain conditions CAN get discharged, but employee withholding taxes can NEVER get discharged in bankruptcy.
However, since usually most or all of your other debts will get discharged, after the Chapter 7 case is finished you might then have the means to enter into a payment plan with the IRS/state/local tax agency to pay off the withholding taxes. But again, the tax agency will likely be more aggressive about getting paid quickly than with a simple income tax debt. So this may not be a sensible option, especially if the amount of withholding taxes is relatively large.
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Types Of Tax Debt: Secured Priority And General Unsecured
Before dealing with interest and penalties, it is vital to understand the differences in the way the bankruptcy code classifies tax debt.
General Unsecured Debt. Unsecured income tax debt is debt that is not priority debt and is not secured by a lien. Other common types of unsecured debts include unsecured credit cards, bank loans, medical debts, personal loans, etc. Although most general unsecured income tax debt is dischargeable under the 3-2-240 rules, the taxing agency will sometimes allege that debt is nondischargeable for another reason, such as a late-filed return.
Example:George owes the IRS $12,000 in back taxes for 2010. He filed his forms on time. George filed for bankruptcy in 2016. The entire $12,000 is a general unsecured debt and dischargeable, assuming no exceptions apply.
Priority Tax Debt. Income tax debt classified as priority debt is unsecured tax debt that does not fall under the 3-2-240 rules. Other priority debts include certain government charges, child support, maintenance, etc. Priority debts are non-dischargeable in bankruptcy. However, penalties and some interest on priority tax debt may be dischargeable in Chapter 13. (See the Penalties and Interest section below.
Example:Lauren files for bankruptcy in 2016. She owes taxes for 2015 and 2014. Because these taxes do not fall under the 3-1-240 rule, they are priority tax debts and are not dischargeable in bankruptcy. Lauren may want to consider if she should wait to file.
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Many people think that bankruptcy is a simple process that will erase their debt and give them a fresh start. While this is partially true, there are some debts that are much easier to discharge than others. Some debts cannot be discharged at all, so it is important to become familiar with the different laws and requirements that are associated with bankruptcy and debt discharge.
Some of the debts that are commonly asked about include things like student loan debt, child support payments, debt from medical bills, and debt that is owed to the federal government in the form of taxes. While most of these debts are nondischargeable by bankruptcy, debts associated with taxes can be a tricky issue. The 2 kinds of tax debts that are most commonly asked about involve liens because of unpaid taxes and unpaid income taxes. Depending on the type of bankruptcy you are filing you will have different options when it comes to tax debt. Below, it is explained in more detail, but it is always best to consult with an El Paso bankruptcy lawyer as the language or paperwork may be too complicated to understand.
About the Author: Jeff Davis is the Owner of the Davis law firm, and a highly experienced El Paso bankruptcy attorney. To find out more information about a El Paso bankruptcy lawyer, please visit www.jeffdavislawfirm.com.
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Getting A Fresh Start
Installment Agreements and Offers in Compromise are useful, but there are situations in which these devices are unavailable, inappropriate or inadequate. In these cases, relief can often be obtained through bankruptcy. Contrary to popular opinion, a properly timed and structured bankruptcy can discharge many federal and state income tax liabilities, thus providing a much needed fresh start. Furthermore, bankruptcy can be useful in contesting the amount or validity of a tax when other judicial forum cannot be used.
Can Sales Tax Or Employee Withholding Tax Be Included In Bankruptcy
Can sales tax or employee withholding tax be included in bankruptcy?
The short answer is no:
- Sales tax and employee withholding taxes are nondischargeable in Chapter 7 bankruptcy and Chapter 13 bankruptcy
Nondischargeable means that they wont go away if you file bankruptcy on them.
These two types of taxes are different from income taxes, which can be dischargeable in bankruptcy in the right circumstances.
Generally, only businesses and their owners will owe sales tax and withholding or trust fund taxes.
A How Do Debts Become Not Discharged
These types fall into two categories:
The automatically not discharged debts include Domestic Support Obligations , certain taxes, fines and penalties owed to a governmental unit. These are some, ut not all, exceptions to discharge.
Others require the creditor to file a formal objection to discharge, which is like a lawsuit, on which there would be a trial to prove the required elements. There is a deadline in every case for filing an objection to discharge, which is approximately 3 months from the date of filing.
For more specific details on which debts are not discharged in bankruptcy, see my bankruptcy discharge page.
Bankruptcy And Taxes: Qualifying For Discharge
Whether you can discharge tax debt will depend on the type of tax, how old the tax debt is, if you filed a return, and the type of bankruptcy. Federal income taxes in Chapter 7 are dischargeable if you meet all of the following conditions:
- The discharge is for income taxes: Payroll taxes and penalties for fraud are not eligible for discharge.
- You filed legitimate tax returns: You filed a tax return for the relevant tax years at least two years before filing for bankruptcy.
- The tax liability is at least three years old: The tax debt is from a tax return that was originally due at least three years before filing for bankruptcy.
- You are eligible under the 240-day rule: The IRS assessed the tax debt at least 240 days before you filed for bankruptcy. If the IRS 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 and withdrawing cash from a bank account and hiding it.
- You did not commit tax fraud: The return contains no information that was intended to defraud the IRS.
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Tax Liens Under The 3
Discharging income taxes in bankruptcy does not automatically remove a tax lien. You can certainly file for bankruptcy with a tax lien, and the underlying debt will be discharged . However, any lien against the property you acquired before filing for bankruptcy would still stand. Fortunately, there are options for dealing with tax liens after bankruptcy.
Voluntary Release of a Post-Discharge Tax Lien. In Chapter 7 cases, the IRS will often release liens after a bankruptcy discharge when the taxes are dischargeable, and there is little property to which the lien can attach. However, the debtor may need to request the release of the lien.
Settlement of a Tax Lien. The IRS usually will not release a lien after discharge when the debtor has substantial nonexempt property holdings. However, it is sometimes possible to negotiate a settlement of the lien in such cases for less than the full amount.
Payment of a Tax Lien in Chapter 13. In Chapter 13 cases, the debtor must pay the tax lien through the Chapter 13 plan as a secured debt. Once the lien is paid in bankruptcy, and the debtor receives a discharge, the IRS or other taxing agency will remove the lien. Again, you may have to contact the agency if it fails to act within a few months of the discharge.
ENFORCING THE BANKRUPTCY DISCHARGE
LIMITATIONS ON DISCHARGE UNDER THE 3-2-240 RULESgirl
Some Tax Debt Is Dischargeable In Bankruptcy
Many people believe that IRS tax debt cannot be discharged in a Chapter 7 bankruptcy. That is not true. We have represented many clients who owed the IRS money and were able to discharge some, or all of it. We also help the clients with strategies that enable any non-dischargeable tax debt to be addressed and resolved. Dont think that if you owe the IRS money, a Chapter 13 repayment plan is your only option. We have several other options that are much more desirable and can eliminate the IRS debt. The good news is once youve eliminated that debt, its gone forever and youre finally free from an overwhelming financial burden that could threaten your efforts of trying to buy a home or obtain a new job. Keep reading to learn more about how we deal with IRS debt at Erin B. Shank, P.C.
First, in order to discharge IRS tax debt, the following conditions must be present:
Another issue is whether or not the IRS has filed a tax lien. Even if the IRS has filed a tax lien, there are exemptions that are allowable, even with the IRS for tax liens. Additionally, the tax lien is only valid after the bankruptcy to the extent of the value of your assets. If you have a pre-existing lien on the asset, such as a mortgage or other secured loan, the tax lien is only valid as to your equity in that asset after taking into consideration the tax lien.
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