What Are The Requirements For Tax Discharge
There are a number of pre-requisites that have to be met before you can solve your bankruptcy tax debt. In order to be cleared of all income tax debt , the following minimum requirements have to be met:
- 3 years need to have passed since your returns were last due to be filedthis includes any extensions that you may have received.
- The returns were filed in a timely manner or its been at least 2 years since the returns were filed.
- There was no fraud or attempts to avoid and evade paying the IRS .
- The taxes havent been assessed in the last 240 days.
Sometimes, there are occasional exceptions and ways to get around the above requirements. You shouldnt give up on filing for bankruptcy to absolve yourself of tax debt until you have a qualified professional take a look at your files first. Even if you cant completely get rid of your tax debt through bankruptcy, you may be able to get a partial tax bankruptcy discharge for some of itand set up a payment plan for the rest.
All You Need To Know About Income Taxes And Bankruptcy
Sometimes, taxes are dischargeable, and sometimes, not dischargeable in bankruptcy. We know that discharge ability relies on a number of factors. Many couples and individuals file for bankruptcy with our law firm for various reasons. Some people found themselves facing unmanageable debt from credit cards or medical bills, others ended up losing their jobs and ultimately had to rely on credit cards in order to survive. You can find a solution to these problems with our tax debt relief.
Past due state and IRS income and general excise tax debt is quite common during a period of financial hardship. Sadly, the state and IRS can be a powerful creditor. Our Maui bankruptcy and income tax attorneys provideChapter 7 bankruptcy,Chapter 13 bankruptcy, andtax resolution services to help people experiencing past due tax problems. So, if you are one of those people going through these difficult financial problems, then all you need to do iscontact us. We have a team of experts who can help you get rid of tax debts with ease and with the right guidance of tax debt relief.
Every Situation Is Different
Bankruptcy is sometimes referred to as an insolvency solution. Insolvency is defined as the inability to pay your bills as they become due, because of lack of funds. There are many insolvency solutions in Canada, including bankruptcy, consumer proposal, and .
As an example, a person with a high income may be able to service $100,000 in debts without any problems. Their income is preventing them from becoming insolvent, despite the high payments they must make on their debts.
Another person, this one with a lower income and higher expenses, perhaps due to a larger family, may have great difficulty servicing a mere $10,000 in debts. The bills are comparatively small, but they are piling up unpaid, and creditors may be calling.
This second individual, with the lower debts, may be a candidate for bankruptcy and the protection it offers, while the person with higher debts may be able to service them on their own.
So, the qualification for bankruptcy depends on a lot more than the mere amount of debt.
Conversely, even if the amount you owe is equal or greater than the minimum amount of debt required by the law for filing bankruptcy in Canada, and you are having difficulty paying your bills, that does not necessarily mean that you are facing bankruptcy.
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Can Bankruptcy Discharge My Tax Debt
This depends on your unique situation and whether or not your income tax debt qualifies. ;If you file a Chapter 13 bankruptcy , tax debts are repaid in a structured payment plan. ;In a Chapter 7 , the debt in question needs to meet the following conditions to be discharged:
- The tax debt is accessed by the IRS at least 240 days before bankruptcy filing.
- The debt in question is income taxes and it is at least 3 years old.
- Tax returns were filed for the past 2 years before filing for bankruptcy.
- No tax fraud or evasion has been committed.
The Return Was Filed At Least Two Years Ago
The tax debt must be related to a tax return that was filed at least two years before the taxpayer files for bankruptcy. The time is measured from the date the taxpayer actually filed the return. In most cases, this covers the same period of time as the due date rule, unless you missed the due date and filed the return late.
Tax debts that arise from unfiled tax returns are not dischargeable. This is an important distinction, because the IRS routinely assesses tax on unfiled returns. These tax liabilities can’t be discharged unless and until the taxpayer files a tax return for the year in question.
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How To File Bankruptcy In Canada
If youre struggling with unmanageable debt in Canada, the first thing you should do is meet with a Licensed Insolvency Trustee.
A Licensed Insolvency Trustee will discuss your personal financial circumstances with you, and help you to understand your debt relief options. Bankruptcy may not be the most appropriate option in fact, alternatives like a consumer proposal or debt consolidation may be more suitable. Bankruptcy for many is the best option for beginning a fresh start financially. Discover more about the process of filing bankruptcy.
What Taxes Are Nondischargeable Under Bankruptcy Law
While some tax debt may qualify for discharge under bankruptcy law, there are some exceptions and types of tax debt that cannot be included in your bankruptcy filing. Some tax debts that are not dischargeable include:
- Tax liens recorded against any property before you filed bankruptcy are still liens against that property even if you might not be personally liable
- Your most recent property taxes that were due before you filed bankruptcy
- Taxes that have been withheld by a third party such as payroll taxes which are to be sent to the government
- Tax penalties on nondischargeable taxes that are not punitive
- Some types of employment taxes, excise taxes and customs duties taxes
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What Happens To A Nondischargeable Tax Debt
Income tax debts are treated differently depending on whether you file a Chapter 7 bankruptcy or a Chapter 13 case.
- Chapter 7 bankruptcy. Except for the automatic stay, bankruptcy cases don’t have much effect on tax debts that can’t be discharged. Once the bankruptcy court issues the discharge, the court clerk will close the bankruptcy case. If the bankruptcy case doesn’t discharge the IRS tax debt, the IRS will be free to resume collection actions.
- Chapter 13 bankruptcy. If you have nondischargeable IRS debt, you can use a Chapter 13 payment plan to manage it. You’ll propose a plan to pay your IRS debt over a three- to five-year period. You’ll still get the benefit of discharging your older unsecured IRS debt, and your nondischargeable debt will get paid in full.
New Obligations To File Tax Returns
In a further melding of the tax and bankruptcy worlds, the BAPCPA contains several new provisions regarding the filing and disclosure of tax returns.
First, under BC §521 a debtor in Chapter 7 or Chapter 13 must give the trustee a copy of the tax return for the year preceding the year in which the petition is filed. In addition, BC §1308 now requires that no later than the day before the BC §341 hearing in a Chapter 13 the debtor must file all tax returns that were due for the four tax years prior to the year in which the petition is filed. Within limits, the trustee can continue the meeting of creditors to give the delinquent debtor more time to file the returns.
Compliance with the new BC §1308 obligation to file pre-petition returns is coupled with new BC §1325, permitting the Court to confirm a Chapter 13 plan only if the debtor has filed the required pre-petition returns. And in addition to catching up on unfiled returns, the BAPCPA requires that the debtor file post-petition returns by their due dates . Upon a request by the Court, the trustee or a party in interest, the debtor can be required to file with the Court copies of all returns due while the case is pending, including returns required during the life of the Chapter 13 payment plan.
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You Can Not Be Found Guilty Of Tax Fraud
You are ineligible for tax-debt bankruptcy protection if you filed a fraudulent tax return. This occurs when you knowingly fail to file your income tax return or falsify information on your tax return. The line between unintentional negligence and fraud is not always clear. That is why many people leave tax preparation to the experts.
Restrictions On Access To Bankruptcy
Even while the treatment of taxes in Chapter 13 has grown to more closely resemble that of similar liabilities in Chapter 7, the BAPCPA has imposed a new means testing system for those with primarily consumer debt, preventing many debtors from filing under Chapter 7 at all. However, income taxes are not considered consumer debt. And thus a debtor whose biggest creditor is the IRS may avoid the problem altogether. Consequently, an element of all future pre-bankruptcy planning will be measuring and perhaps managing the balance between the clients consumer and nonconsumer debt.
Under the BAPCPA, a Chapter 7 involving primarily consumer debt will be dismissed upon a finding of abuse. Such a finding can be based on a presumption applicable under certain circumstances, or on general grounds including bad faith considering the totality of the facts. If the debtors income is above the median income for the state in which the case is filed, either the presumption or the general grounds standard can be raised by the Court, the trustee, or a creditor. The presumption is inapplicable if the debtors income is below the median income level for the state.
If the means test applies, it compares monthly income to allowable deductions. Income is defined as the debtors average income over the six full months prior to the petition date.
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Can You File Bankruptcy On Taxes
Yes, you can file bankruptcy to resolve back taxes, but not for all of your tax debts. Every chapter has a different set of requirements and processes. Chapter 7 is often a saving grace for anyone in over their head with insolvency because it completely eliminates all dischargeable back tax debts. This strategy is used for those who are unable to pay back income tax debt; however, it is more difficult to get approved for than the other chapters of bankruptcy.
While you can file Chapter 7 for income tax debt, the same strategy will not work for payroll taxes. In addition, rules on previously unfiled tax returns are not uniform and newer liabilities are unable to be resolved. Chapter 7 is not the only way to handle bankruptcy and taxes with IRS, and you should consider other chapters before filing. Learning more about the different chapters of bankruptcy will help you determine which type can help you in your circumstances.
Many Tax Relief Companies Are Scams
If you have unpaid federal tax debt and are looking for help to resolve it, be careful to avoid scams. There are many scammers out there just waiting to take your money without getting you the tax debt relief you deserve.
You’ve probably heard a commercial spokesperson on your television say, “Settle your tax debt for pennies on the dollar.” This sounds tempting if you need a solution to your tax problems. And while there are tax relief companies that can help you settle back taxes, many of these companies are scams. These scam tax relief companies charge you money promising that they’ll help you out with your overdue tax payments, but they often end up making a bad tax situation worse.
These companies may require an upfront fee, sometimes $3,000 or more, and they often also charge monthly fees of hundreds of dollars. But once you pay the money to get help, some companies break their promise to resolve your tax debt with the IRS.
Unfortunately, many of these companies don’t actually help consumers and some people lose thousands of dollars by hiring them and still owe the same amount or more to the IRS.
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The Automatic Stay Does Not Apply To Debt Incurred After Filing Bankruptcy
The auto-stay serves to protect you from creditors trying to collect debt you incurred before you filed bankruptcy. The auto-stay does not prevent creditors from trying to recover debt you incurred after you filed your bankruptcy, also called “post-petition debt.” If you incurred tax debt after filing a Chapter 7 or 13 bankruptcy, the automatic stay will not prevent the IRS from attempting to collect.
Tax Returns And Chapter 13 Bankruptcy
You must be up to date on your tax returns before you file 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 very 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 would owe after you file a proper return.
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Bankruptcy Can Be Used To Stop A Property Tax Sale
Fortunately for debtors facing a property tax sale of their home, bankruptcy can be used to stop the sale if they move quickly.
Heres what you need to do:
Other Ways To Get Rid Of Tax Debt
Unfortunately, many individuals dealing with tax debt dont meet the qualifications above to eliminate tax debt through bankruptcy. Others dont want to go through the bankruptcy process when there are simpler methods of eliminating tax debt. Below is a list of all the different tax debt relief options available:
- Installment agreements: You can negotiate an installment agreement with the IRS to pay off your debt in monthly installments with up to ten percent interest applied to each year of debt.
- Offer in compromise: With an offer in compromise, you can negotiate your debt with the IRS to pay a lesser amount that will satisfy your outstanding debt. You can essentially pay a fraction of its value.
If you have overwhelming tax debt, contact our Rancho Cucamonga tax attorneys today to discover which tax debt relief option is best for you. Call us today at 766-9996!
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State Taxes That Can Be Discharged In Bankruptcy
The state taxes that can be discharged most often are old state income taxes. They follow the same rules for dischargeability as federal income taxes, and it depends on when the return was due, when it was filed and when the tax was assessed. The rules for federal income tax discharge can be found in Does Bankruptcy Wipe Out Tax Debt? If the state income tax that you owe meets the rules for federal income tax discharge, then the state income tax can be discharged too.
Free Yourself Of Tax Debt With Bankruptcy
As a bankruptcy lawyer TN trusts, one of the most common questions I get asked every tax season is, Can bankruptcy get rid of my tax debt? First of all, if you have tax debt, know that youre not alone, and theres no reason to feel shame. Tax debt is an issue that affects more folks than you may realize.
Collectively, Americans owe billions in back taxes.;According to recent data and estimates from 2020, outstanding tax debt in America hovered around $527 billionroughly $381 billion in federal tax debt, reported by the IRS, and $146 billion in state tax debt. We have reason to believe that figure has only increased in the past year.
So, can bankruptcy get rid of tax debt? Often;the answer is yes, but it depends on your situation.
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