What About My Tax Refund
This question comes up quite a bit. If you anticipate a large refund, talk about this issue with your attorney. It may be a good idea to delay filing until after you receive your tax year refund for the past year. Technically, when consumers file for bankruptcy, all their non-exempt property goes to the trustee. That includes tax refunds. Since the policies vary depending on where you live, you may be able to use the wildcard exemption to exempt the tax return.
Owing past-due income taxes can be stressful. These bills are often so high that, even if you fall behind a little, you could end up owing a lot of money. Fortunately, if your debts meet certain requirements, filing Chapter 7 bankruptcy can erase past-due income tax debt in one fell swoop.
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By Carron Nicks
A bankruptcy case can wipe out older income tax debt that meets qualification guidelines. It can also give you a way to pay back recently assessed taxes at a payment amount lower than what the IRS would offer. In this article, you’ll learn more about how bankruptcy can help with your IRS debt.
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Bankruptcy, in several instances, can be an effective way of dealing with past-due federal and state income tax debt.
In a Chapter 7 or Chapter 13 bankruptcy, income tax obligations are dischargeable if the tax return for the year in question was filed and:
The 3 Year Rule: The tax return was due more than 3 years prior to the bankruptcy filing. If the debtor obtained an extension, the due date would be the extension deadline.
The 2 Year Rule: For a late filed return , if the delinquent return was actually filed more than 2 years prior to the bankruptcy filing.
The 240 Day Rule: If there has been an assessment by a taxing authority, it was made more than 240 days prior to the bankruptcy filing.
The debtor did not file a fraudulent return or willfully attempt to evade paying taxes.
Example #1 Debtor timely filed their 2003 tax return . There have been no recent assessments by the government and the return was not fraudulent. The taxes still owed from the 2003 return are dischargeable if the bankruptcy is filed after April 15, 2007 .
Example #2 Debtor files their 2001 tax return late, on October 31, 2005. There have been no recent assessments, and the return was not fraudulent. The taxes still owed from the late filed return are dischargeable if the bankruptcy is filed after October 31, 2007 .
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Tax Debt: Bankruptcy And The Automatic Stay
Most IRS collections start with a notice of past-due taxes. Then, every few months, the IRS sends another letter. Each is slightly more threatening than the last. Eventually, these letters become legal notices. They also sometimes involve filing a lien, seizing a bank account, or garnishing wages. The automatic stay acts as a pause button. It prevents creditors from contacting you to collect their debts. As soon as you file your voluntary petition, the automatic stay usually takes effect. When that happens, IRS agents can’t even send you a letter about your back taxes. They are forbidden from trying to collect the debt.
The automatic stay extends to property as well. Although most of your personal property is exempt â or protected â during Chapter 7, the IRS and other debt collectors can’t touch any of the more valuable assets you happen to own.
An automatic stay is a powerful tool for protecting individuals. No matter what stage IRS collection efforts are in, the automatic stay stops them cold. With few exceptions, the stay applies to all forms of communication between debtors and creditors. Creditors who violate the stay can face serious consequences. And, although the stay prevents creditors from contacting you, it does not prevent you from beginning conversations with them. This puts you in control of negotiations with your creditors during bankruptcy.
Potential Tax Refund Issues
Another issue related to taxes and bankruptcy in Oklahoma is that of tax refunds. If someone files Chapter 7 in March and gets a tax refund in May, he will likely relinquish that money to the bankruptcy trustee. However, any tax refunds received once the Chapter 7 is finalized belong solely to the debtor.
In Chapter 13, debtors undergo a partial debt repayment plan. A judge may require part or all of the consumers tax refunds to go toward debt repayment for a three to five year period.
Can Tax Debt Be Discharged In Bankruptcy
While some debts are almost never dischargeable, the rules for other types of debt like tax debt arent quite so clear cut.
Its pretty complicated stuff, says Robertson B. Cohen, a bankruptcy attorney at Cohen & Cohen, P.C. in Denver.
First and foremost, neither taxes you willfully attempted to evade nor penalties for tax fraud are dischargeable in bankruptcy. And, even without fraud, income taxes are dischargeable only under limited circumstances.
There are three elements that need to be satisfied for tax debt to be dischargeable, Cohen says.
- Taxes cant be discharged in bankruptcy until at least three years after they were due. For example, 2020 taxes are due in April of 2021, so cant be discharged until April of 2024.
- You must have filed a tax return for the tax you owe and you must have filed it at least two years before your bankruptcy in order to get it discharged. So if you didnt file 2015 taxes until 2019, youd have to wait until 2021 before the debt could be discharged. And if you never filed a return, it may be impossible to get the tax debt discharged.
- Taxes must have been assessed within 240 days before your bankruptcy filing. So, if you were audited and your taxes were reassessed after Tax Day, youd need to wait until 240 days after the audit.
To determine dischargeability, we order account transcripts from the IRS, Cohen said. Often we will wait to file so we can discharge the most tax debt possible.
Discharging Tax Debt With Chapter 7 Bankruptcy
Meet the requirements listed above and you may discharge your income tax debts by filing for Chapter 7 bankruptcy.
If you qualify for Chapter 7 bankruptcy, you may eliminate unsecured nonpriority debts such as:
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What Debts Cannot Be Discharged In Bankruptcy
Not all debt is dischargeable. The following debts are not dischargeable:
- Child support or spousal support payments
- Student loans, in most cases
- Court judgments against you for bodily injury or death caused by a drunk driving accident
- Certain tax debts
If you have questions about your tax debt, schedule a free consultation with our Cathedral City bankruptcy lawyer. We can assess the dischargeability of your debts.
Payment Plans Or Offer In Compromise
Rather than enter your tax debt into a bankruptcy filing, the IRS provides alternatives that some find to be more desirable. One of these is setting up a payment plan with the IRS for your unpaid taxes. A payment plan is a private agreement which is a legal and binding contract between you and the IRS in which you agree to pay your back taxes in a certain amount within a certain window of time.
There are immediate, short term and long term payment plans available with the IRS, all with different administrative charges attached to them. As may be expected, the sooner you pay in full, the less interest and charges accrue.
Another alternative is an offer in compromise with the IRS. This is a negotiated settlement or deal you make with the IRS for less than the full amount of taxes owed. The IRS will consider such factors as your income, assets, ability to pay, and other fixed expenses when determining a settlement figure. Note that you cannot pursue this option if you are engaged in a bankruptcy proceeding.
In the end, the value of agreements with the IRS for repayment plans and offers in compromise, within the bankruptcy context, depends on how much debt you owe overall and what percentage of it is owed for taxes. The more your debts are IRS debts, rather than consumer debts, the better off you will likely do working with the IRS directly to take advantage of one of these alternatives.
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Can You File Bankruptcy On Irs Debt
Tax season is upon us again, and for many that means tax and other IRS debts. Those struggling to pay off tax related debts may be wondering: can you file bankruptcy on IRS debt? The answer depends on your individual circumstances, but in many cases, bankruptcy offers quick, lasting relief from tax debts. Read ahead to find out when IRS debt can be discharged through bankruptcy.
Could My Bankruptcy Trigger A Tax Audit
Few things in life cause as much anxiety as notification that you are being audited by the Internal Revenue Service . There are certainly red flags that can trigger an audit, however, and some of those include:
- Getting paid in cash
- Working in an industry where the bulk of your earnings comes from tips
- Owning a business, as bookkeeping errors are common
There is no known policy in force at this time with the IRS that would indicate those who file for bankruptcy are specifically targeted for tax audits. Given the limitations of the IRS personnel and the financial resources devoted to audits in comparison with the millions of taxpayers who file for bankruptcy protection, its mathematically impossible to audit that many returns.
But there are similarities to tax audits and bankruptcies. Both put your finances under a harsh spotlight, with assets and debts being scrutinized carefully. Filing for bankruptcy will certainly not be a deterrent to an audit. While filing for Chapter 7 or Chapter 13 can halt certain actions by the government, the Bankruptcy Code exempts IRS audits.
A bankruptcy may offer some protection from the consequences of an audit. Since filing for bankruptcy protects debtors from their creditors, it may be possible to have interest, penalties or even the taxes themselves eliminated or greatly reduced.
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Most Taxes Can’t Be Eliminated In Bankruptcy But Some Can
Updated by Cara O’Neill, Attorney
If you’ve heard commercials offering the hope of eliminating tax debts in bankruptcy, be cautious. It’s not as simple as it sounds. Most tax debts can’t be wiped out in bankruptcyyou’ll continue to owe them at the end of a Chapter 7 bankruptcy case or have to repay them in full in a Chapter 13 bankruptcy repayment plan. In this article, learn:
- when you can discharge a tax debt
- what happens with federal liens, and
- how to manage tax debt using Chapter 13.
You’ll also learn the pros and cons of filing tax returns before or after bankruptcy.
If you’d like step-by-step guidance through the bankruptcy process, read What You Need to Know to File for Bankruptcy in 2021.
Exceptions To Discharge Under The 3
There are circumstances when taxes are not dischargeable, even though the debtor meets all of the requirements of 3-2-240 rules.
TAX EVASION AND FRAUD If a taxpayer willfully evades taxes or commits tax fraud, the taxes involved are not dischargeable. §523. However, this rule applies only in the case of deliberate tax evasion, not an honest mistake.
UNFILED TAX RETURNS If a Debtor has not filed a tax return for a tax period that ended pre-petition, the Debtor will not receive a personal discharge for the tax liability relating to that tax period much to the Debtors consternation,
TAX RETURN FILED FOR TAXPAYER BY IRS WITHOUT TAXPAYERS CONSENT IRS can file tax returns for you and assess taxes against you if and when you do not file a tax return. This can render non-dischargeable, the taxes arising from these substitute returns filed by the IRS if the tax return is filed without your agreement. It is not dischargeable in bankruptcy even if it otherwise meets the 3-2-240 rules. Whether the taxes assessed on tax returns filed for a taxpayer by the IRS are dischargeable depends mostly on whether the IRS filed the forms with or without the taxpayers permission. TIP: It is critical you file your tax returns to enable you to discharge them in bankruptcy. Preferably, and to be safe, file them on time, even if you dont have funds to pay the tax liability arising from the return.
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Can Bankruptcy Stop Tax Liens
Does bankruptcy remove tax liens? The answer is a partial yes. Legal and tax experts agree that bankruptcy cannot completely stop pre-existing tax liens by the IRS.
While the automatic stay will stop new lien petitions, existing liens arent removed when you file for bankruptcy. For bankruptcy and IRS liens which existed prior to bankruptcy, the bankruptcy will be of little effect.
Heres how it works. If you have a federal tax lien placed on any property because of back taxes that you owe, the discharge of that debt during bankruptcy wont remove the lien. The lien will have to be removed separately if you wish to sell your property with clear title.
Therefore, bankruptcy for liens is not the best option. One recommendation is to get back on your feet financially, through bankruptcy, and then attack the liens with help from your lawyer.
Tax Debt In Chapter 13 Bankruptcy
If you file for Chapter 13 bankruptcy where the court trustee arranges a partial repayment plan, then your tax debt will be included in the plan. If it meets the five criteria listed above, then it will be deemed a nonpriority debt.
This means it will get treated like credit cards and other debts that are generally easy to discharge. Instead of paying off the full amount, the court will determine how much you can reasonably afford to repay. You will repay some of the debt you or the IRS or your state tax office in your payment plan. Then the remaining balances will be discharged.
If your tax debt does not meet those five, then it may be deemed a priority debt. You will still be able to pay it off under your repayment plan. However, it must be repaid in full.
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Irs And Chapter 13 Bankruptcy
You should apply for a Chapter 13 bankruptcy discharge if you cannot file under Chapter 7 bankruptcy. The only reason why you may find it difficult to discharge your personal income tax during bankruptcy is if its termed priority unsecured debt, Chapter 13 bankruptcy will make you pay your debt in full.
One major advantage to filing for bankruptcy in IRS tax is that the service will halt all collection efforts till you get a discharge on the money, or you get a rejection. Also, Chapter 13 bankruptcy can help you pay a loan for less than what you owe.
If you desperately need IRS to stop their constant calls and harassment, then filing for a Chapter 13 bankruptcy can do that. It helps you repay your debts without foreclosures, levies, and wage garnishments. Discuss with your bankruptcy attorney before you file for a Chapter 13 bankruptcy or any other type of bankruptcy. One thing to remember when filing bankruptcy is that there are certain rules that are dependant on the state. For example, if you are filing bankruptcy in Tennessee, filing bankruptcy in Indiana, filing bankruptcy in Illinois, or filing bankruptcy Louisiana, there are going to separate and individual rules for each place.
What Debts Can Be Discharged In Bankruptcy
Most unsecured debts can be discharged through Chapter 7 bankruptcy. Unsecured debts are debts that are not backed by collateral. For example, unsecured debts may include medical expenses, credit card debt, utility bills, back rent, and personal loans.
A secured debt, on the other hand, has your home, car, or another asset attached to secure the loan. A secured debt may be a mortgage or car payment. With a secured debt, if you fail to pay, the item securing the debt can be taken and sold to satisfy your debt. Examples of this include home foreclosure or car repossession. While your liability to repay a secured debt can be discharged under Chapter 7 bankruptcy, the attached lien does not disappear.
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Complete Irs & Tax Representation
Taxes are complicated. So is bankruptcy. Sometimes taxes can be discharged in bankruptcy. And bankruptcy can also be used to protect a person from tax collection enforcement.
DISCHARGING TAXES IN BANKRUPTCY
There are numerous sets of rules your attorney must know for discharging taxes in bankruptcy:
NOTE: If there is a tax lien, there are additional, substantial obstacles to deal with. With a qualified attorneys advice, you might seek to not remove a tax lien, or to have some special protection against the IRS.
WILL BANKRUPTCY STOP AN IRS AUDIT OR IRS COLLECTION?
Just recently, a potential client from Aurora IL asked us whether filing bankruptcy stops an IRS examination. Bankruptcy does not affect an IRS tax audit, and you must move forward with the audit.
However, if you have been contacted for an audit and have not yet filed your bankruptcy case, then speak with your attorney to prepare you for the special bankruptcy concerns in the IRS audit.
IS A TAX REFUND SUBJECT TO BANKRUPTCY?