Chapter 7 Bankruptcy Requirements To Discharge Irs Income Taxes
The IRS only discharges taxes in bankruptcy if the taxes owed meets certain conditions. If you do not meet these or if you miss a deadline even by a day, the tax may be due at the end of your bankruptcy proceedings. Here are the conditions:
On top of these requirements above, you must prove to the courts that you have filed the last four years of tax returns. You also need a copy of your most recent tax return. Unfortunately, if you have any tax liens, a Chapter 7 bankruptcy will not get rid of them.
Does Bankruptcy Clear Tax Debt In Canada
When you file for bankruptcy, you enjoy CRA debt relief along with relief from all other unsecured creditors. The common belief that you cant escape tax debt this way comes from the past. Before 1992, the Canada Revenue Agency was considered a preferred creditor in the Bankruptcy and Insolvency Act, and it could use this status to oppose a debtors discharge from income tax debt.
Since 1992, it has been listed as an ordinary unsecured creditor on the same level as any bank, credit card company, or other lenders. CRA debt can now be discharged unopposed.
There are some exceptions to this rule, including those who owe over $200,000 in taxes, and that number represents more than 75% of their proven debts. Otherwise, as a general rule, if you owe Revenue Canada money, insolvency can help.
Are State Taxes Dischargeable In Chapter 7
Yes, state taxes are dischargeable in Chapter 7 bankruptcy, in certain circumstances. Generally speaking, state income tax discharge factors line-up with those used by the federal government. So, if you are able to discharge your federal income taxes with a Chapter 7 bankruptcy, you should be able to discharge state income taxes.
However, since these circumstances can vary state-by-state, especially when it comes to business taxes, you should speak with one of our tax professionals before moving forward to get the most up-to-date information.
If you cannot discharge your state income taxes with a Chapter 7 bankruptcy, a Chapter 13 bankruptcy may be more helpful. With a Chapter 13 bankruptcy, the taxes wont go away, but they can be spread out over the course of three to five years to make paying them more manageable well cover more on Chapter 13 bankruptcy below.
Regardless of what chapter bankruptcy a debtor decides to file, the tax may still be collectible from the debtors pre-bankruptcy property if the IRS filed a Notice of Federal Tax Lien before the bankruptcy petition was filed. If the IRS did not file a lien before the bankruptcy petition was filed, the tax lien will generally be removed as a result of the bankruptcy.
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Your Cra Debt Options
If you are having CRA debt issues, speaking with a licensed insolvency trustee to help review your options is the first step. They can see what the best solution is for you, which may include a consumer proposal or a bankruptcy. When successfully entering into either a bankruptcy or a consumer proposal, this stops any further actions against you by the CRA.
If you owe the CRA money, dealing with CRA tax debt should be your top priority. Not only can the agency use widespread collection actions, but it can also withhold GST and Child Tax credits or even remove money from your bank account leaving you out of luck when it comes to meeting other obligations like mortgage payments.
Dont delay if you find yourself in tax debt. There is a solution to all types of debt.
If you live in the GTA, book a free consultation with the caring professionals at David Sklar & Associates. We are here to help assist you in making the best decision for you.
Chapter 7 Vs Chapter 13
Chapter 7 and Chapter 13 are the two most common types of personal bankruptcy.
In a Chapter 7 bankruptcy, a trustee appointed by the bankruptcy court will liquidate many of your assets and use the proceeds to pay your creditors some portion of what you owe them. Certain assets are exempt from liquidation. Those typically include part of the equity in your home and automobile, clothing, any tools you need for your work, pensions, and Social Security benefits.
Your nonexempt assets that can be sold off by the trustee include property , a second car or truck, recreational vehicles, boats, collections or other valuable items, and bank and investment accounts.
In Chapter 7, your debts are typically discharged about four months after you file your bankruptcy petition, according to the Administrative Office of the U.S. Courts.
In a Chapter 13 bankruptcy, by contrast, you commit to repaying an agreed-upon portion of your debts over a period of three to five years. As long as you meet the terms of the agreement, you are allowed to keep your otherwise-nonexempt assets. At the end of the period, your remaining debts are discharged.
In general, people with fewer financial resources choose Chapter 7. In fact, to be eligible for Chapter 7, you must submit to a means test, proving that you would be unable to repay your debts. Otherwise, the court may determine that Chapter 13 is your only option.
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Can A Tax Lien Be Removed Or Released In Bankruptcy
If the IRS places a tax lien before you file Chapter 7 bankruptcy, the tax lien generally stays. In most cases, the tax lien will still be present after the Chapter 7 bankruptcy, and you wont be able to sell your property until you pay the taxes associated with the lien.
In Chapter 13, once your payment plan is complete, the tax lien gets removed, but in most cases, it stays in place during your three or five-year repayment plan.
Bankruptcy And Taxes: Eliminating Tax Debts In Bankruptcy
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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Certain Income Taxes Can Be Completely Written Off In Bankruptcy
The law does get complicated. But most of the time discharging an income tax debt requires just meeting two conditions:
- the pertinent tax return was due more than 3 years before the bankruptcy case was filed , and
- that tax return was actually submitted more than 2 years before your bankruptcy case is filed.
There are other conditions but they involve circumstances that dont often apply to most people. The main point is that most income taxes can be discharged by filing the tax return and waiting long enough.
Contact Us Today For Questions About Income Taxes In Bankruptcy
Whether bankruptcy is the best defense method for dealing with debt or taxes for your circumstances. A seasoned bankruptcy attorney helps you evaluate your debt relief options to help meet your goals, including protecting your home for as long as possible.
Give Phoenix Fresh Start Bankruptcy Attorneys a call at 602-598-5075 to schedule a free consultation with one of our bankruptcy attorneys. If you have any other questions about bankruptcy, one of our attorneys will be more than happy to offer advice on your particular situation.
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Important Note On Late
Filing a tax return late is a costly mistake, whether or not you file for bankruptcy. In bankruptcy, it can be catastrophic. Unfortunately, a some courts, including a federal appeals court, have held that a tax return filed even a day late is not a tax return under the statute allowing discharge of tax debts in bankruptcy. In other words, if your forms were filed late without an extension in any given tax year, you cannot discharge the taxes for that year.
To be sure, the courts’ interpretations of the statute are tortured and run counter to the Bankruptcy Code’s purpose. Hopefully, the U.S. Supreme Court will clarify this issue. However, until then, I advise clients that debts arising from late-filed forms may not be dischargeable. In the meantime, if you have unfiled tax returns, you should get them filed as soon as possible.
Quick Note:If you know you will be filing late, get an extension. Even if you cannot pay the amount due, at least file the forms. As discussed below, you can lose your ability to discharge taxes in bankruptcy and incur unnecessary penalties if you file late without an extension.
The Importance of Filing Tax Returns on time. There here is no upside to not filing your tax forms or filing them late. In my Philadelphia bankruptcy practice, I sometimes see clients whose taxes would have been dischargeable, if only they had filed their tax forms or filed them on time.
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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What Makes A Chapter 12 Bankruptcy Different Than A Chapter 7 Or Chapter 13
In a Chapter 12 bankruptcy, usually, the debtor is a family farmer or fisherman. To qualify as a family fisherman, at least half of their income from the previous year must be from fishing. To qualify as a farmer, at least half of a taxpayers income for the last three years must come from farming activities. In a chapter 12 bankruptcy, taxes are priority liabilities, and the taxpayer must pay them first.
If You Declare Bankruptcy Do You Still Owe The Cra
Owing money to the CRA can be stressful. There are many ways you can wind up in tax debt, such as not filing your personal income tax returns, failing to pay taxes on business income, HST payments for the self-employed, or inadequate payroll deductions from your employer if you work multiple jobs.
When you owe the CRA money, they charge penalties and interest on unpaid amounts. There is a late filing penalty of 5% plus 1% of your balance owing each month, and the penalty increases if you repeatedly fail to report income. Once you start owing money, it starts to grow, and theres no hiding from it.
If youre afraid that you are going to owe the government money, dont delay filing your taxes. You will only incur harsher penalties and wind up owing more in the end.
The Canada Revenue Agency can garnish your wages, seize your bank accounts, or even register a lien on your home. Given the broad collection powers available to the agency, the sooner you can act on CRA debt, the better. Fortunately, filing bankruptcy or a consumer proposal can stop CRA collection actions.
A common question we hear at David Sklar & Associates is does bankruptcy cover tax debt in Canada? When you , you can include tax debt, but its not the only way to fix the problem! A consumer proposal provides debt relief from unsecured creditors and includes debt forgiveness from CRA as well.
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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.
Tax Liens And Bankruptcy
Liens of any kind remain after a bankruptcy discharge is entered. Even if the underlying debt is discharged. However, the lien only remains against property that exists on the date the bankruptcy case is filed.
For example, if you own real estate that is subject to a tax lien, you can discharge the tax debt, but the lien will remain against the property until it is sold or refinanced and the taxes paid.
However, the lien cannot attach to any new assets acquired after filing the bankruptcy case. So there is a definite benefit to discharging tax debts even where there is a lien attached to property.
Federal tax liens can attach to ANYTHING you own, including retirement accounts and right down to your socks and underwear. Often, this does not amount to much and it is possible to get the taxing agency to abate the tax and release the lien after a discharge if the value of property to which the lien has attached is of relatively insignificant value.
This is something a good bankruptcy attorney can negotiate after your case is completed.
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What Assets Are Exempt In A Chapter 7 Bankruptcy
When an asset is exempt, that means that you dont have to sell it to repay your creditors. The assets that are considered exempt vary from state to state. In general, here are a few items that are usually exempt:
- 401s, IRAs, and other retirement plans
- Welfare, Social Security, and Unemployment Insurance
- Primary vehicle under a specific value
- Home Equity
- Books, tools, clothing, and other personal property
Can Income Taxes Be Included In A Bankruptcy
Bankruptcy has limits on discharge of federal income taxes
The inability to pay taxes is one of the problems that many people experience as they prepare to file bankruptcy. As a result, the tax bill keeps growing and becomes another significant debt added to others that are owed.
While there are conditions under which taxes may be included in the court action, debtors need to be clear about what the U.S. Bankruptcy Court will allow them to discharge when the case is completed.
Georgia attorney Jonathan Ginsberg writes on the BKBlog that several conditions must be met by the debtor for a discharge of federal taxes. In Chapter 7, the taxes due must be more than three years old and must have been assessed on prior returns at least 240 days before the bankruptcy was filed. The court also requires that the debtor must not have filed a fraudulent tax return or tried to evade paying taxes.
In addition, tax debt will be considered by the court only if the Internal Revenue Service hasn’t yet filed a tax lien on the debtor’s assets. While the discharge will prevent the IRS from garnishing debtors’ wages or attaching their bank accounts, any tax liens that are on the property at the time of filing bankruptcy will have to be paid when the property is sold. In some cases, the government may be able to seize property to collect the discharged tax debt.
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Does Bankruptcy Eliminate All Of My Debts
You might be wondering which of your debts can be included in a bankruptcy, eliminating your responsibility to try and repay them. The simplest answer is that a bankruptcy eliminates most, if not all, of what are known as unsecured debts. These include any credit cards, lines of credit, personal loans, payday loans and income tax debt. When you file for bankruptcy, you will no longer have to worry about repaying these debts.
On the other hand, there are certain types of debt that cannot be eliminated by filing for bankruptcy. Even after you complete the bankruptcy process, you will still be responsible for repaying the following debts:
Secured debts, such as a mortgage or car loan. Because these forms of debt are guaranteed by an asset , you need to continue to make payments otherwise, your creditors can repossess your vehicle or your property.
Child support or alimony. These payments must continue even if you file for bankruptcy. If youre behind on your payments, your former spouse or partner will be considered a preferred creditor in your bankruptcy claim.
Student loans, if youve been out of school for less than seven years. If its been more than seven years since you were a full-time or part-time student, then student loan debt can be included in bankruptcy.
Any court fines, penalties, bail bonds or restitution imposed from a criminal or civil trial.