Five Rules To Discharge Tax Debts
Dischargeable tax debts must meet five other criteria.
Tax debts are associated with a particular tax return and tax year, and bankruptcy law lays out specific criteria for how old a tax debt must be before it can be discharged.
Tax debt is dischargeable in Chapter 7 bankruptcies if it meets all five of these rules:
- The due date for filing the tax return in question was at least three years ago.
- The tax return was filed at least two years ago.
- The tax assessment is at least 240 days old.
- The tax return was not fraudulent.
- The taxpayer is not guilty of tax evasion.
Apply these criteria to each year’s tax debt to determine whether that year’s unpaid balance is dischargeable through bankruptcy. Some of your debts might be eligible, while others might not.
Tax Debt In Chapter 7 Bankruptcy
With Chapter 7 bankruptcy, known as straight bankruptcy, things are more straightforward. If you meet the five criteria defined above, then the tax debt gets discharged. The discharge will also include penalties and interest generated by that debt.
If the tax debt doesnt meet those criteria, then it and any penalties generated from it will not be discharged. You can still file for bankruptcy and have your other debts discharged, but you will still owe those taxes and must repay them.
What Happens When You File For Bankruptcy
Filing for bankruptcy will have major repercussions on the rest of your finances. It will discharge you from unsecured debts, which includes credit cards, payday loans, amounts owing to utility companies, student loans under certain circumstances, and tax debt.
The downside is that you will have to sell any non-exempt assets you own to pay off your creditors, as well as 50% of any surplus income over a certain threshold.
Bankruptcy will provide CRA debt relief, but it will come at a cost. Some of the assets that could be liquidated if you declare bankruptcy include:
- Vacation and investment properties that are not your primary residence
- Secondary vehicles
- Non-RRSP investments, including TFSAs, as well as RRSP contributions made in the 12 months before filing
- Jewelry, artwork, collectibles, and other valuables.
In addition to surrendering assets, you will also have to make surplus income payments for 21 months until you are finally discharged from your debts. Surplus income payments are 50% of any net income earned above a certain threshold that depends on the size of your family. It should give you enough to live, but the payments can be considerable depending on your income.
If you owe money to the CRA, bankruptcy will eliminate those debts, but these are all factors to consider. Talk to an insolvency trustee about your options.
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Will Bankruptcy Wipe Away My Unpaid Property Taxes
A reader sent in the following question about bankruptcy and property taxes. Please note that the advice that follows is presented for informational purposes only and is not intended as legal advice. Consult with a qualified lawyer for advice specific to your situation.
I owe several years back taxes on my home. If I file bankruptcy will it help with these taxes?
First of all, my empathy to anyone out there considering bankruptcy. It’s a powerful tool and absolutely the right choice for some folks in difficult situations, but reaching the point of researching bankruptcy usually means that things have been challenging, and likely for a long time. Bankruptcy is a long, complicated process. Its there to help you hit the reset button, and while it can remove a majority of your debts, it doesnt absolve you of all of your debt obligations.
The Automatic Stay Stops Irs Collection Of Tax Debts During Your Bankruptcy But The Irs May Be Able To Collect From You Later
By Hari Ender, Attorney
The automatic stay will stop the IRS from collecting taxes debt that you owe once you file a Chapter 7 or Chapter 13 bankruptcy. But depending upon the nature of the tax debt you owe, the IRS may be permitted to collect from you later. Continue reading for more information about the automatic stay in bankruptcy and what it can do to help you with your tax debt.
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When You File Will Affect How Many Tax Refunds You Lose
When you declare bankruptcy in the calendar year can mean the difference between losing only one years tax refund or losing multiple refunds. Your tax refunds for any years taxes that need filing, plus the refund from the year you file go to your bankruptcy estate.
If you normally get a tax refund, January or February might be a bad time to file bankruptcy.
Early in a calendar you likely would not yet have filed taxes for the previous year as you dont normally get t-slips until the end of February, so therefore if you file bankruptcy in that period, the refund would go to the bankruptcy estate along with the refund next spring. This is why many people wait until after their tax returns have been filed and they have received their refund to declare bankruptcy.
Does the time of year matter when youre considering filing a consumer proposal?
One key difference between a bankruptcy and consumer proposal is that you keep your assets, and that includes any tax refund owing to you. So you dont lose any tax refunds in a proposal.
There is however still a timing issue to consider when filing a proposal if you owe money, or will owe money, to Canada Revenue Agency. Your proposal will include all tax debt up until the year of filing but not any owing for the year you file your proposal.
Tax Liens & Bankruptcy
Tax debt and tax liens are different things. Tax debt is simply money that you owe either the State of Wisconsin or the IRS. A tax lien is a legal judgment secured against your property to satisfy a tax obligation that you owe the state or federal government. Should you qualify for Chapter 7 bankruptcy, and meet all of the above criteria, unfortunately bankruptcy will not eliminate prior tax liens.
Your obligation to pay off the debt will be discharged, but not eliminated. However, the IRS will no longer be able to go after your income or bank account.
However if a tax lien was filed before you filed for bankruptcy, the lien will remain on the property. If you ever want to sell your property, you will have to pay off the lien before you can do so.
Do you have other tax related, or bankruptcy questions? Let us know. Were happy to help.
The experienced attorneys of Burr Law Office are here to answer your bankruptcy questions. Give us a call at today.
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Consumer Proposals Vs Bankruptcy And Cra Debt
A consumer proposal is a popular alternative to bankruptcy because it provides debt relief from unsecured creditors, including debt forgiveness from CRA. When you file a consumer proposal with a licensed insolvency trustee you are not required to sell any of your assets to repay your debts or pay any surplus income.
To start the consumer proposal process, you will first need to schedule a consultation with a licensed insolvency trustee where you will review your finances. After reviewing your income, expenses, and total debts, the two of you will find a fair amount that you can pay each month to all of your creditors. These payments can last up to five years after which, you will be discharged from all debts covered by the proposal, including CRA debts.
Tax debt in Canada can be included in a consumer proposal and the CRA will often accept less than your full amount owing, though how much they will settle for will depend on the situation. In order to get the CRA to accept your proposal, you will have to file any and all outstanding tax returns. If you want CRA debt relief and 50% or more of your total unsecured debts are owed to the agency, you will have to get them to accept the proposal.
If a consumer proposal is not a viable option for you, then filing for bankruptcy may be your next solution. With this, your trustee would be required to file a pre-bankruptcy tax return and a post-bankruptcy tax return.
Does Bankruptcy Clear Tax Debt
Filing for bankruptcy can clear tax debt depending on the nature and circumstances of your situation. Certain tax obligations may be discharged, forgiven, or managed in a bankruptcy filing. Here are some of the criteria that the IRS will consider when deciding whether or not you or your business is eligible for complete tax forgiveness.
- The dates you filed your required returns : The IRS is more likely to assist you when they see that you have made an effort to pay your taxes on time.
- The age of the taxes: The IRS is going to examine the date the returns were last due or meant to be filed.
- The date of assessment of the taxes.
- Willfulness: If the IRS has any reason to believe that you willfully attempted to evade payment of the tax by fraud they will immediately dismiss any tax forgiveness through bankruptcy.
Whether or not the IRS will grant tax bankruptcy discharge is directly tied to the above factors as well as any other miscellaneous factors that pertain to the particular chapter you choose to file under.
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Can You Declare Bankruptcy On Taxes Owing
The short answer, for most people, is yes you can declare bankruptcy on taxes owing. In fact, 50% of the people that file personal bankruptcy include some form of tax debt. It is usually personal income tax, but also includes HST, source deductions, as well as directors liability for corporate tax debts. This applies to people that file bankruptcy and for people that file a consumer proposal. Canadian bankruptcy law doesnt differentiate between tax debts and other kinds of unsecured debt.
The long answer is still yes, you can declare bankruptcy on taxes owing, with the following restrictions:
Both of these things are quite rare you have to go out of your way and deliberately break the law in order for the Canada Revenue Agency to use these tools to collect your taxes.
There are a couple of other things that you need to be aware of, should you file for bankruptcy and have a tax debt.
Tax Debt Discharge In Chapter : A Timeline
All these rules apply to the bankruptcy process as well. If you have past-due tax debt, things will be a little different.
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Filing: On your paperwork, you will list the tax debt as priority unsecured debt in Part 1 of Schedule E/F.
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Trustee meeting: At this meeting, the trustee will review your paperwork, confirm your identity, and ask questions about any red flags in the paperwork.
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Discharge: The court has the power to discharge both secured and unsecured debts. If your debts meet all requirements, you should receive a notification of a discharge within about 60 days.
In special circumstances, you’ll have to meet additional qualifications to discharge some types of debt. This may be true in cases involving tax liens. It’s also true in student loan cases. If you want to discharge student loan debt, you must convince the court that there is an undue hardship preventing you from repaying the loan.
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Five Tips For Bankruptcy Filers
Carl G. Archer, a bankruptcy lawyer with Maselli Warren, P.C., in Hamilton, New Jersey, offers the following tips for individuals filing bankruptcy and an income tax return.
Remember, with TurboTax, we’ll ask you simple questions about your life and help you fill out all the right tax forms. Whether you have a simple or complex tax situation, we’ve got you covered. Feel confident doing your own taxes.
Closing Of Your Bankruptcy
Personal
When you receive a discharge from the court or your bankruptcy case is closed:
- Youll receive post-bankruptcy letter with your remaining tax debt. Pay in full or contact us to set up a payment plan.
- Well start collection action
- You are still required to continue to file and pay your taxes
Business
When youre closing your bankruptcy:
Liquidation
The court appointed third party must:
- File a final tax return
- Pay the minimum tax for the following tax year, if applicable
- Close the bankruptcy within that same year
Reorganization plan
Once the plan is confirmed, you must follow the terms of the plan and continue to file and pay your taxes.
Liquidation plan
Once the plan is confirmed, you must follow the terms of the plan. Continue to file and pay your taxes. File a final tax return and close the bankruptcy within the same year.
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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.
Current Returns Must Be Filed First
Many individuals hope to file for bankruptcy first, then reap the benefits of a hefty tax refund after bankruptcy, but this is not possible. In order to file for bankruptcy in the first place, the law requires individuals to have already filed their current tax returns. So for example, an individual filing for bankruptcy in summer 2013 would need to have already filed 2012 tax returns.
Those filing for bankruptcy must file tax returns for the current year so the Internal Revenue Service can assess any back taxes owed and collect them first. Whats more, the return is used to gauge the individuals financial situation, and creditors have a right to such information as well.
Individuals who have not filed their current tax returns before submitting a bankruptcy petition can expect to have the request denied.
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Can You Discharge Taxes In Bankruptcy
It depends but is possible for individual taxpayers. LLCs, corporations, and partnerships usually cannot discharge taxes in a Chapter 7 bankruptcy.
With Chapter 7, an individual taxpayer can get taxes discharged if they meet specific criteria. With Chapter 13 bankruptcy, you usually end up paying all your taxes in your repayment plan, but you may be able to get a small percentage of non-priority taxes owed discharged. The rules on taxes owed also vary for Chapter 11 and Chapter 12.
Why Is The Irs More Dangerous Than Other Creditors
The IRS is more dangerous than other creditors because the IRS can:
- Place tax liens
- Take future tax refunds to satisfy debts
- Use traditional debt collection actions such as wage garnishment, and bank levy
Tax debts are also much more difficult to discharge in bankruptcy, often requiring that you wait 3 years or more before they can be discharged.
Because settling a debt often has the effect of trading a regular creditor for the IRS, it is wise to check with an experienced Minnesota bankruptcy attorney and maybe an accountant.
This will ensure that you know the best way to lower your debt without owing lots of money to the IRS before agreeing to a settlement with a creditor.
Please Note: This article does not constitute tax advice or legal advice.
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