The Tax Assessment Must Be At Least 240 Days Old
The IRS routinely assesses taxes on unfiled returns. If this happens to you, your tax assessment must occur at least 240 days prior to filing for bankruptcy. If the 240th day prior to the bankruptcy petition falls on a Saturday, Sunday, or legal holiday, then the relevant period is extended back to the prior business day.
Reasons for the tax assessment may include:
- The taxpayer reports a balance due.
- An IRS audit determines a balance due.
- An IRS proposed assessment becomes final.
However, this tax liability cannot be discharged until you file a tax return for the year in question.
Tax Debt And Bankruptcy
People often think that they cannot eliminate their tax debts through bankruptcy, but this is a misconception. Many income tax debts and even Ohio state taxes, can be discharged through Chapter 7 and Chapter 13 bankruptcies.
Bankruptcy, a legal way to have many debts forgiven, can put you on the road to financial recovery. Chapter 7 provides for full discharge of allowable debts. Chapter 13 provides a payment plan to repay some debts, with the remainder of debts being discharged. Tax debts are treated the same way in both Chapter 7 and Chapter 13 petitions.
How do you know if bankruptcy is right for you? The skilled and seasoned Ohio bankruptcy attorneys at Fesenmyer Cousino Weinzimmer understand that mounting debts can overwhelm even the most well-intentioned people. We offer a free consultation to evaluate your financial situation and find a plan thats best for you.
State of Ohio Chapter 7 Bankruptcy and Tax Debts
A Chapter 7 bankruptcy is considered to be a fresh start bankruptcy, as it enables you to discharge most or all consumer and/or business debts. Chapter 7 bankruptcy is over in a few months, so you can begin rebuilding credit quickly.
A Chapter 7 bankruptcy discharge of income taxes wipes out the personal obligation to pay the tax and prevents the taxing authority from going after your bank account or wages. IRS and local tax debts may be dischargeable through Chapter 7 bankruptcy if the tax debts meet the following requirements:
Nondischargeable Tax Debts
Get Irs Debt Help From An Experienced Bankruptcy Tax Attorney
The takeaway message here is that it may be possible to discharge income tax debts that meet specific criteria. However, if you file for Chapter 13, you must be financially prepared to pay off other tax debts over the life of your reorganization plan. If you file for Chapter 7, you will not be required to enter a reorganization plan but may risk losing some of your assets to liquidation. An experienced tax attorney can help you make the decision thats right for you or your business, and work with you to determine the most advantageous time for filing.
At the Tax Law Office of David W. Klasing, our tax resolution lawyers have more than 20 years of combined experience helping taxpayers and business entities obtain relief from state and federal tax debt. We can help you evaluate whether filing for tax motivated bankruptcy is a practical option, and if not, help you explore alternative options for tax debt relief.
We work with taxpayers throughout the state of California, in addition to foreign and out-of-state taxpayers. If you have a question about tax-related bankruptcy, contact us online for a confidential, reduced-rate consultation, or call the Tax Law Office of David W. Klasing at 681-1295.
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Does Bankruptcy Clear State Tax Debt
State tax debts can sometimes be cleared by filing for bankruptcy. It depends on the type of tax debt that is owed. Many of the same rules apply to state income tax debt and tax debt owed to the Internal Revenue Service , but not all. In this article, you’ll learn about:
- state rules for wiping out tax debt
- state taxes that aren’t dischargeable in bankruptcy, and
- paying off nondischargeable tax in Chapter 13 bankruptcy.
Be aware that tax liability resulting from business ownership, such as sales, withholding, and franchise tax, have specific rules that vary between states. Youll want to speak with an experienced attorney about your particular case.
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.
Let’s Summarize…
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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Can You File Chapter 7 Against The Irs
One of the most common questions we get is can you file chapter 7 against the IRS, and the answer is often yes. To be able to discharge federal income tax debt, you must qualify based on the conditions mentioned above.
While you can file Chapter 7 for income tax debt, the same strategy will not work for payroll taxes. Additionally, rules on previously unfiled tax returns are not uniform and newer liabilities are unable to be resolved. A Chapter 7 bankruptcy cannot discharge tax liens recorded before filing.
Under this chapter, the debtor will receive an absolute right to discharge all of the debts that are included as part of the bankruptcy. However, taxpayers will not receive an absolute discharge for their tax debts. The following tax debts will not be discharged in a Chapter 7 bankruptcy:
- Tax debts for which no original returns were filed by the taxpayer
- Tax debts for which a return was filed within 2 years of the bankruptcy petition
- Tax debts based on returns that were fraudulently filed
- Tax balances that arose because a taxpayer was found to have willfully attempted to evade their tax responsibility
Other tax debts, including assessed penalties are dischargeable unless the event that gives rise to the penalty occurred within 3 years of the bankruptcy or relates to an underlying tax balance that is not dischargeable.
Chapter 7 is not the only way to handle bankruptcy and taxes with the IRS, so you should consider other chapters before filing.
Home Mortgage And Other Property Liens
If you have a lien on property, such as a home mortgage, you cannot have the mortgage discharged in bankruptcy.
State laws vary, but you can generally keep your home in bankruptcy if you keep making the payments and if you do not have more equity in the home than you are allowed to keep by state law.
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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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Can You Eliminate Taxes In Bankruptcy
Can you get rid of and eliminate tax debt owed to the Internal Revenue Service or State of California Franchise Tax Board or other taxing agencies such as the California State Board of Equalization ?
Or, as many often ask: Can you include taxes in a bankruptcy filing?
The answer in many cases is : YES! Certain tax debts are dischargeable or may be managed in bankruptcy.
The primary relevant factors to determine dischargeability are
- the age of the taxes ,
- the date of assessment of the taxes ,
- the dates you filed your required returns
- and whether you willfully attempted to evade payment of the tax by fraud.
Whether you can discharge these taxes in a bankruptcy case depends on a combination of the above factors as well as under what chapter of bankruptcy you file.
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What Happens When The Bankruptcy Is Over
Once the bankruptcy is over, the IRS can seize many of the assets you owned when you filed for bankruptcy. In most cases, this is not an issue because taxpayers dont tend to have many assets lying around after bankruptcy. Unless you owned real estate or retirement funds, the old tax lien wouldnt affect you all that much. Another point to remember is that bankruptcy law gives debtors exemptions when liquidating their assets in a Chapter 7 bankruptcy.
Bankruptcy Discharge Wont Remove Liens
While the automatic stay can stop new lien petitions, existing liens arent removed when you file. 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. Even if the debt itself is discharged during your bankruptcy, the lien must be paid. Make sure to do this as quickly as possible, so you dont have issues if you try to sell the property.
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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:
Debt Relief Alternatives To Bankruptcy
Bankruptcy has serious consequences. A Chapter 7 bankruptcy will remain on your for 10 years, and a Chapter 13 will remain for seven years. That can make it more expensive or even impossible to borrow money in the future, such as for a mortgage or car loan, or to obtain a credit card. It can also affect your insurance rates.
So itâs worth exploring other types of debt relief before filing for bankruptcy. Debt relief typically involves negotiating with your creditors to make your debts more manageable, such as reducing the interest rates, canceling some portion of the debt, or giving you longer to repay. Debt relief often works to the creditorâs advantage, too, as they are likely to get more money out of the arrangement than if you were to declare bankruptcy.
You can negotiate on your own or hire a reputable debt relief company to help you. As with , there are scam artists who pose as debt relief experts, so be sure to check out any company that youâre considering. Investopedia publishes a regularly updated list of the best debt relief companies.
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Timing Of Filing And Age Of Tax Debt
As our IRS tax debt attorneys noted above, tax debts are generally treated as non-dischargeable . However, some exceptions can arise around income taxes, depending on when the tax in question was due:
- Three-Year Rule The pertinent tax return must have been due a minimum of three years prior to the bankruptcy filing date. This includes any tax filing extensions the debtor might have obtained.
- Two-Year Rule The debtor must have filed the pertinent tax return a minimum of two years before filing for bankruptcy.
- 240-Day Rule The IRS must not have assessed the debt within the 240 days preceding the debtors bankruptcy. Keep in mind that some events can extend this window of time, such as the debtor making an offer in compromise .
Due to these timeframes, more recent income taxes may be impossible to wipe out through bankruptcy. However, older income tax obligations that meet these criteria could be eligible for discharge.
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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Debt That Chapter 7 Bankruptcy Cannot Discharge
Unfortunately, Chapter 7 bankruptcies cannot remove existing tax liens. Bankruptcy only removes your personal obligation to pay the tax. Tax liens recorded before you filed for bankruptcy remain as long as there is equity in the pre-bankruptcy property.
Disclaimer: If you are considering filing for bankruptcy to resolve tax debt, you need a tax attorney. It is easy to make a serious mistake that could be construed as tax evasion or trigger a tax audit. Although bankruptcy can be an excellent tax relief tool, it will have devastating effects on your credit and reputation. A licensed tax professional can help you determine what is the best tax relief options for you.
How To Avoid Future Tax Debt Problems
To avoid debt problems in the future, it is important that you understand how you arrived at your current situation, in which you owe a great deal of money to Canada Revenue Agency.
Do you owe taxes because you cashed in the last of your RRSPs to pay your debts? This cant happen again soon, because any remaining RRSPs will be liquidated in your bankruptcy.
On the other hand, if you are self-employed, you can easily find yourself with a tax debt at the end of the year. It is important to prepare for such an eventuality and to make sure that you make payments throughout the year.
We recommend that at the beginning of each year, self-employed individuals estimate the amount of income taxes they will owe and then remit one twelfth of this amount to the tax authorities even if the tax authorities do not require such frequent payments. Then, at the end of the year, tax time will actually be enjoyable as you will have minimal or no accumulated income tax debt. You might even receive a refund!
Finally, make sure you have realistic expectations concerning your lifestyle and your expenses . When do we accumulate tax debt? When we dont feel we can afford to pay it. Proper budgeting and business management can eliminate the monthly deficit that often contributes to serious tax arrears.
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