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Can Bankruptcy Clear Tax Debt

Tax Returns And Chapter 13 Bankruptcy

Can Bankruptcy Discharge Tax Debt?

You must be up to date on your tax returns before filing a Chapter 13 case, but the rules allow you a little wiggle room. You’ll provide copies of the returns for the previous four tax years to the Chapter 13 trustee before the 341 meeting of creditors .

If you’re not required to file a return, your trustee might ask for a letter, an affidavit, or a certification explaining why. Sometimes local courts will impose additional rules for documents in their districts.

If you owe the IRS a return but don’t file it before your 341 meeting of creditors, things can happen to derail your case.

  • A motion. The trustee will file a motion giving you a brief period to provide your returns. If you miss the deadline, the court can automatically dismiss your case, leaving you no chance to plead your case to the judge.
  • A substitute return. The IRS might file a “best estimate” claim based on your past income. The problem? IRS estimates are almost always higher than what you’d owe after filing a proper return.

Can The Bankruptcy Court Deny A Petition

Yes. Bankruptcy filings are not frivolous procedures, and the court can and will deny a petition if the debtor does not comply with rules and procedures. Federal judges and bankruptcy is a federal jurisdiction take a dim view of perjury, failure to account for assets, hiding or destroying records, or hiding property with the intent to defraud ones creditors. Even if your debts are dischargeable, the judge may decide to deny the petition. The US trustee, the bankruptcy trustee, and your creditors may also object which will cause the judge to consider denying a discharge.

Van Horn Law Group has a decade of experience in helping to engineer positive outcomes with all sorts of debt issues including but not limited to bankruptcy. Our experienced staff and attorneys will have your back from the day you walk in the office door until the day you walk out of bankruptcy court with the successful discharge. We understand the many factors that lead people into debt and into filing bankruptcy. We are here to help with offices in West Palm Beach and in Fort Lauderdale, open Monday through Saturday. We welcome walk-ins and will even open on Sunday if you have an appointment with us. Get the help you need to leave your debts behind and get a fresh start.

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The IRS and Californias Franchise Tax Board are also subject to this automatic stay. To get full protection, youll list them among your creditors on your petition. This prompts the bankruptcy court to notify them of your filing.

With an automatic stay, the IRS and FTB are prevented from taking many of the collection actions they usually employ. This includes sending you collection letters and late payment notices. The IRS is blocked from garnishing your wages and levying your bank accounts. They are also restricted from taking a current tax refund from you.

The IRS and Franchise Tax Board must keep their hands off your property for the time being. However, if youre filing for bankruptcy just before the IRS is scheduled to sell off some of your property, youll want to personally notify them immediately of your automatic stay to prevent the loss of your assets.

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Managing Taxes With Chapter 11 Bankruptcy Filing

Another type of bankruptcy is Chapter 11 or also known as Business Reorganization. Mostly, this bankruptcy filing is used to reorganize a corporation or business. Company owners must come up with a strategic plan on how they will continue their businesses operation while paying off their debts. However, to make this work, both the court and creditors must approve such plans.

Generally, corporations file Chapter 11 when their tax debt is beyond the allowable amount to file Chapter 13. Aside from them, business owners that are not corporations may also file for this type of bankruptcy. Compared to Chapters 7 and 13, Chapter 11 is much more complicated and does not discharge some tax debt.

On top of that, the amount of tax debt that can be erased through Chapter 11 depends on various factors such as the following:

  • Type of tax owed

What Happens To My Irs Tax Debt If I File Bankruptcy

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In a Nutshell

The most common of all of debts owed to the IRS is unpaid income taxes, sometimes called back taxes. Chapter 7 bankruptcy is an option if your tax debt meets certain requirements.

Written byAttorney Jonathan Petts.

  • What About My Tax Refund?
  • Debts owed to the IRS come in many shapes and sizes. The most common type of debt people owe to the IRS is back taxes in the form of unpaid income taxes. Now that more people freelance full time or moonlight part-time, back taxes are a bigger issue than ever.

    Looming unpaid debt can be stressful, and the IRS can be aggressive in its efforts to collect back taxes. As a public entity, the IRS is the worldâs largest debt collector, and it has many tools that private debt collectors can only dream of. Fortunately, filing Chapter 7 bankruptcy is a straightforward way to stop IRS harassment. In many cases, as outlined below, bankruptcy might end IRS harassment for good.

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    Kansas City Bankruptcy Lawyer Explains Irs Debt Options

    Tax debt can be particularly stressful to those struggling to make ends meet. It is true that the Internal Revenue Service does not engage in illegal creditor harassment or threats such calls about tax debt are a scam! Letters are always the first indication from the IRS of collection issues that are being pursued. Still, this does not mean that the IRS will not try to collect money from you. The IRS is powerful and persistent, and interest on back taxes and penalties can grow quickly. However, depending on your circumstances, you may be able to use an IRS debt management program to reduce what you owe. Additionally, in some situations, filing bankruptcy can help you cope with or completely eliminate your tax debt.

    If you are overwhelmed by tax debt, contact the attorneys at The Sader Law Firm today. Our attorneys have years of experience and Managing Member Neil Sader, is a board certified specialist in consumer bankruptcy law. We can explain your options for relief from overdue taxes. Together, we can explore options like bankruptcy, which can give you a clean financial slate for both taxes and other debt, in many cases.

    Filing For Chapter 11 Bankruptcy

    Chapter 11 bankruptcy focuses on reorganizing your finances to help you clear debt. This is mainly used by businesses.

    This may involve selling some but not all of your assets. So it can help you to hold onto some assets, like your home, while you clear your debt.

    Reorganizing your assets means that you will have to put together a payment plan. This doesnt eliminate all of your debt but it does make it more manageable. However, if you dont put together a plan during the filing period then your application will fail.

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    Can The Ato Keep My Refunds During Bankruptcy

    Yes, but only if you owe a debt to them or another Commonwealth agency e.g. Child Support or Family Assistance. They will use the tax refund to go towards what you owe.

    The ATO can withhold your tax refunds even if you list these debts in your bankruptcy. For further queries contact the Australian Taxation Office.

    Case study: Felicity

    Need Tax Debt Help Get A Free Consultation With A Kansas City Bankruptcy Lawyer

    Can I discharge tax debt in bankruptcy?

    If you are struggling with back taxes, you may not know all the options available to help you get out from under unmanageable debt. At The Sader Law Firm, we offer free telephone consultations to determine your options. A qualified Kansas City bankruptcy lawyer from our firm will answer your questions. If filing bankruptcy or negotiating with the IRS is in your best interest, we can discuss providing those services.

    Having legal counsel on your side will give you the best chance of successful debt relief and alleviate the stress of facing the IRS alone. Contact us online or to start working on a debt relief plan today.

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    Does Bankruptcy Clear My Tax Debt

    Bankruptcy can provide you with a way out of tax debt. But when it comes to the IRS, being cleared of unpaid tax debt is more complicated than a court-approved discharge of, for example, credit card debt. Filing for bankruptcy can reduce or eliminate federal and state tax debt, as well as back taxes owed to the IRS.

    Discharging tax debts requires meeting certain requirements. Provided you are eligible, you may be free of tax debt in:

    Tax Debt Alternatives To Bankruptcy

    Bankruptcy isnt the only option for coping with tax debt. The IRS may be willing to set up a plan allowing a delinquent taxpayer to pay off debt in installments. If tax debt is the main debt youre dealing with, an IRS payment plan could be as good an option as Chapter 13 and save you the legal costs.

    If you cant pay off your tax debt with an installment plan, you may instead be able to use the IRS offer in compromise program. Heres how it works: You offer to pay the IRS less than the full amount, and if you qualify, the IRS will forgive the remaining balance. But understand that you cant make an offer in compromise once youve filed for bankruptcy.

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    When You Can Discharge Tax Debt

    If you need to discharge tax debts, Chapter 7 bankruptcy will likely be the better option because it’s a quicker process and doesn’t require debt repayment. But Chapter 7 isn’t available to everyone. You must be eligible for Chapter 7 bankruptcy, and your tax debt must qualify to be wiped out with a Chapter 7 bankruptcy discharge.

    Here are the conditions you must meet before eliminating federal income taxes in Chapter 7 bankruptcy:

    • The taxes are income taxes. Taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy.
    • You did not commit fraud or willful evasion. If you filed a fraudulent tax return or willfully attempted to evade paying taxes, such as using a false Social Security number on your tax return, bankruptcy can’t help.
    • The debt is at least three years old. The tax return must have been originally due at least three years before filing for bankruptcy.
    • You filed a tax return. You must have filed a tax return for the debt you wish to discharge at least two years before filing bankruptcy. , you have not filed a “return” and cannot discharge the tax. In some courts, you can discharge tax debt even if you filed a late return if you meet the other criteria.)
    • You pass the “240-day rule.” The IRS must have assessed the income tax debt at least 240 days before you file your bankruptcy petition, or not at all.

    How To Beat The Irs: Dischargeability Of Taxes In Bankruptcy

    Can You File Bankruptcy On Tax Debt

    How to Beat the IRS: Dischargeability of Taxes in Bankruptcy

    With a few exceptions, the Bankruptcy Code adheres to the age-old rule that in life, only death and taxes are certain. It isnt so easy to beat the IRS because the Bankruptcy Code significantly limits a debtors ability to discharge taxes in bankruptcy. A bankruptcy professional has to have an intimate understanding of the Bankruptcy Code in order to know when you can beat the IRS and when you cant. Your starting point should be an understanding as to when a discharge of a tax is permitted.

    Beating the IRS in bankruptcy court can sometimes feel like asking the San Diego Padres to beat the New York Yankees. The IRS has very low hurdles to clear in order to make a tax debt stick around. First, the IRS must show that the tax is of the kind that cant be discharged. The type of tax, the date the tax was assessed, the date it was due, whether it is a tax or penalty and other factors are all relevant. Second, the IRS must prove this only by a preponderance of the evidence, which is lawyer talk for maybe Im right, and maybe Im wrong. The IRS must also demonstrate that the claim is for either a tax or tax penalty. The Bankruptcy Code does not define what is a tax and just because Congress or a local legislature called it a tax does not necessarily mean it is a tax.

    I. Priority and Gap Period Taxes: The Wait Three Years After Filing the Return or 240 Days After Being Assessed Rule.

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    Does Bankruptcy Clear Tax Debt In Missouri And Kansas

    Tax debt is not quite the same as other consumer debts, and cannot always be discharged through bankruptcy. However, in some cases, particularly with old taxes, bankruptcy can provide debt relief. You can discharge tax debt in either Chapter 7 bankruptcy or Chapter 13 bankruptcy if:

    • The debt is for income taxes. Property and other types of taxes are not eligible for discharge.
    • The tax debt is at least three years old and returns were filed. New taxes are generally nondischargeable for this reason. However, the statute of limitations on tax collection is 10 years, so if you have older overdue taxes, bankruptcy can help.
    • You filed tax returns for eligible debt at least two years before filing bankruptcy. If you do not file, the IRS may complete a return for you. However, this substitute return is not sufficient if you wish to file bankruptcy. You must file a tax return for each year yourself, even if you miss the deadline. We often tell clients that being unable to pay your taxes is not a crime, however, not filing a return is a crime!
    • Your debt passes the 240-Day Rule. If the IRS has assessed your tax debt, it must be at least 240 days prior to the day you file bankruptcy. In an assessment, the IRS considers what you owe and tries to negotiate a solution with you.

    Bankruptcy And Taxes: Eliminating Tax Debts In Bankruptcy

    By FindLaw Staff | Reviewed by Bridget Molitor, J.D. | Last updated April 19, 2021

    In many cases, a debtor is still liable for tax debt after bankruptcy. However, bankruptcy law allows the discharge of tax debt in some circumstances.

    A debtor is more likely to have tax debt discharged in Chapter 7 bankruptcy than in a Chapter 13 bankruptcy. In Chapter 13, tax debt, along with other debt, enters a repayment plan. Chapter 7 bankruptcy, on the other hand, allows a debtor to discharge certain kinds of debt, such as credit card debt and medical bills, and in some instances, federal tax debt.

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    Using Bankruptcy To Your Advantage

    With the right timing, it is possible to use bankruptcy to block the IRS from filing a tax lien in the first place. Remember, though, that not all income taxes are discharged in bankruptcy. For instance, you cannot discharge income tax debt linked to a tax return you filed less than three years ago.

    Filing For Chapter 7 Bankruptcy

    How a Bankruptcy Can Help with Your Income Tax Debt

    Chapter 7 bankruptcy is the most straightforward kind of bankruptcy. After filing, you sell off your assets and use any money from them to pay off your creditors. Some assets, like cars or household furnishings, are exempt from sale.

    This is also one of the most extreme types of bankruptcy. Almost all your assets can go up for sale, including your home and any other property you own.

    After you have paid off as much as you can your remaining debts will be forgiven. This means that you no longer have to pay them off and creditors will no longer contact you for payments.

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    Does Bankruptcy Clear Tax Debt Installments

    You can pay your tax debts in installments. Even the IRS might not oppose this plan since they want to get back the money. But you can consider installments when you have the financial status to support it. Otherwise, you will have to avoid this option. If you do not want to pay the tax debt money, you can think of the programs mentioned below.

    What Is The Innocent Spouse Clause

    Tax collectors are extremely reluctant to give taxpayers a free pass, which is why income tax debt is the only kind dischargeable in bankruptcy proceedings. The only other recourse, Innocent Spouse Relief, is extremely difficult to obtain. The debtor must prove to the IRS that, without their knowledge, their spouse either failed to report or underreported income, or fraudulently claimed deductions or credits on a jointly filed return.

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    Conditions For Discharging Tax Debt

    The first requirement for dischargeable tax debt is that it be income tax debt, specifically. This would include unpaid federal and state income taxes but not, for example, back payroll taxes such as withholding for Social Security and Medicare.

    A second condition is that the tax debt cant be too freshgenerally, newer than three years. To be more precise, the original tax return must have been due at least three years before the date of the bankruptcy filing.

    Next, you must have filed a valid tax return for the debt at least two years before filing for bankruptcy. And the return must have been submitted on time. If you requested and received extensions and filed by the extension date, thats considered on time. If you filed after the extension date, the return might not be considered valid and the tax debt wont be dischargeable.

    In addition to rules about age of the debt and timing of the return, theres a requirement that the IRS must have assessed the debtin other words, recorded it on the agencys booksat least 240 days before the bankruptcy filing. This requirement may also be satisfied if the IRS has not assessed the debt yet.

    If the IRS did assess the debt and then stopped collection due to a previous bankruptcy filing or other cause, the usual 240-day time frame could be extended, potentially making it tougher to discharge the debt.


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