Reduce Your Tax Debt Or Pay It Off Through Chapter 13
I can show you how to use Chapter 13 to reduce your dischargeable tax debt even if youre not eligible for Chapter 7 due to high income or non-exempt assets. And, even if you owe taxes that are non-dischargeable in bankruptcy, I can show you how to save money by paying these taxes over 5 years without interest or penalties through Chapter 13.
Filing Bankruptcy Stops Irs Collection Efforts
When you file a bankruptcy petition, the automatic stay provisions of the Bankruptcy Code protect you from collection efforts by creditors, including the IRS. The automatic stay is very important because it prevents the IRS from issuing a tax lien, garnishing your wages, or seizing the funds in your bank accounts.
In addition, if your tax debt meets certain criteria, you may be eligible for a discharge of your tax debt.
Chapter 13 Bankruptcy And The Irs
Chapter 13 bankruptcy works with your creditors and basically puts you on a payment plan for your debts. They are not completely erased, although some may be reduced.
Chapter 13 payment plan may help you manage IRS debt, but not get rid of it completely. Your payment plan will be based on your income, assets, and bankruptcy exemptions.
The court will determine whether your tax debt is a priority or nonpriority. This will determine if and what you have to pay back with past debts.
The payment plan is with the bankruptcy court, not the IRS with a Chapter 13 bankruptcy.
In order to file a Chapter 13 bankruptcy, all required tax returns within the four years of filing must be filed.
Concluding The Tax Debt Debate
We have finally answered the epic question.
Does bankruptcy clear IRS debt?
The answer is, it can. But you need to know the facts in order to make an educated decision.
Take time to educate yourself or consult a professional to decide if bankruptcy is the right choice for you.
We can help you decide if bankruptcy is the right choice for you.
Contact us today for a free consultation!
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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.
Irs Taxes And Chapter 7 Bankruptcy Requirements & Details
Chapter 7 applies to individuals who cannot make consistent monthly liability payments regardless if the individual is solvent or insolvent. With a Chapter 7 bankruptcy, you can discharge some taxes, but first, you need to liquidate your non-exempt assets. The definition of non-exempt assets varies from state to state, but generally, you can keep homes with a moderate amount of equity, a vehicle, and your personal belongings. Typically, filing Chapter 7 takes 90 to 180 days, and it costs a few hundred dollars in administrative fees.
What To Look For In A Representative
If you do hire a tax expert to help you with your tax problems, make sure they are an IRS enrolled agent, a Certified Public Accountant , or an attorney with tax experience.
An enrolled agent is a tax professional authorized by the IRS to represent taxpayers in IRS matters. An enrolled agent can file your tax returns, and they can negotiate with the IRS to settle your outstanding tax debt. An enrolled agent has much more knowledge than a typical tax preparer because they’ve passed a difficult test to become one.
A CPA has passed an accounting exam. CPAs do bookkeeping and financial planning and can prepare tax returns along with other important documents.Â
Finally, a tax attorney has experience handling and resolving tax debt matters with the IRS. Tax attorneys are good sources of information and professional advice. You’ll want to check reviews and interview attorneys before you decide which one can best help you deal with your tax situation.
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.
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.
The Automatic Stay Stops Irs Collection Of Tax Debts During Your Bankruptcy But The Irs May Be Able To Collect From You Later
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.
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.
Chapter 11 Bankruptcy Is Best For Businesses But Individuals Can Also Apply
Whereas Chapter 7 and Chapter 13 bankruptcy are for individuals, Chapter 11 bankruptcy is tailored towards businesses and business owners. It is very similar to chapter 13, as it is also a reorganization plan to pay down creditors over a longer period of time. It is substantially more expensive than Chapter 7 or Chapter 13, as well. Individuals can also file for Chapter 11 bankruptcy and generally do so only when their debt exceeds the limits established by Chapter 13.
If Federal Income Or Other Taxes Are Listed As Debts To Be Discharged The Irs May Send A Representative To The 341 Meeting To Question The Debtor About The Listings Or If The Debtor Does Not List Debts Owed To The Irs A Representative
Taxes must meet the following criteria before being forgiven if you did not file a return, if you filed the return late, or if the irs filed a substitute return for you, some bankruptcy courts have held that those taxes will never qualify for a. A creditor cannot seize collateral or collect the debt. You did not willfully evade paying your taxes or file a fraudulent return. Certain irs debt for personal income taxes that are. Not only can bankruptcy clear irs income tax debt, it can get rid of state and local income tax debt as well. It’s not always a clean slate consider all of your options. Learn how discharge works in chapter 7 and 13. If you are a person that has filed bankruptcy, a debtor’s attorney or a u.s. Code is available for individuals who have. This can provide you with valuable time to put your financial affairs in order and get straight. Bankruptcy code lists 19 different categories of debts that cannot be discharged, and several others are very difficult to get discharged. When one declares bankruptcy, the bankruptcy court can acquit once the debt has been invalided, a creditor can no longer take action against the debtor. Bankruptcy itself is a legal process that enables the debtor to eliminate or reduce various personal call our skilled bankruptcy tax lawyers today.
Nondischargeable Income Tax Debt In Chapter 7 Bankruptcy
Priority debts get pushed higher up on the debt-repayment ladder. If money is available to pay creditors in a Chapter 7 case, priority debts get paid before most other debts. You’ll also remain responsible for any remaining balance after your bankruptcy case endsthe amount owed won’t be discharged. Learn more about the differences between priority and nonpriority claims in bankruptcy.
Tax Relief: How To Get Rid Of Back Taxes In 2021
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In a Nutshell
Many people have experienced financial hardship and have been unable to pay their taxes due to unemployment or reduced work hours during the pandemic, but getting tax relief is possible. This article will discuss whether it makes sense for you to hire someone to help you get tax relief, the kinds of programs the IRS offers to help taxpayers with back taxes, and how bankruptcy plays into tax debt. Read on to see how you may be able to get the tax relief you deserve.
Table of Contents
The COVID-19 pandemic has affected many peopleâs income and ability to pay taxes. But, if you get behind on paying your taxes and don’t act fast, your tax situation can quickly get out of hand.Â
This article will discuss whether or not to hire someone to help you get tax relief, the kinds of programs the IRS offers to help taxpayers with back taxes, and how bankruptcy plays into tax debt. Read on to see how you may be able to get the tax relief you deserve.
What Happens To Tax Liens In A Chapter 7 Bankruptcy
Since these existing tax debts are not discharged when you file bankruptcy, it is important to know what will happen to them. In many cases, individuals are still obligated to pay them, but your bankruptcy filing may buy you some additional time.
Chapter 7 bankruptcies trigger an automatic stay that bars creditors, including the IRS, from trying to collect debts. This can provide you with valuable time to put your financial affairs in order and get straight with the IRS.
Stops Post-Bankruptcy Tax Liens
A Chapter 7 bankruptcy can also bar the IRS from attaching new tax liens on pre-bankruptcy tax debts that have been discharged. This creates a clean slate or fresh start that limits the property the IRS can attach to a lien. The IRS may be able to levy property you owned before the bankruptcy, but the new property you acquire after the bankruptcy is in the clear.
Other Ways to Deal with Existing Tax Liens
In addition to the options above, here are a few other ways to eliminate tax liens:
Consult an Attorney Before Making a Decision
Talk to a bankruptcy attorney or CPA before making a decision. Filing for bankruptcy and removing a tax lien are two things you may not want to do by yourself. to receive a free, no-strings-attached consultation with an experienced tax professional.
You Cannot Be Found Guilty Of Tax Evasion
You are ineligible for tax-debt bankruptcy protection if you willfully tried to evade paying taxes. What does the IRS consider as tax evasion? Any type of action where you avoid paying your tax obligation. As you can imagine, there is a fine line between tax mitigation, which is completely legal, and tax evasion, which could land you in jail for a few years. If you have any doubt about how the IRS will interpret your tax mitigation strategy, talk to a tax attorney or a tax relief company that employs tax lawyers.
Dischargeable Income Tax Debt Can Disappear In Chapter 7 And Chapter 13
Some income taxes are completely dischargeable in bankruptcy meaning that in a Chapter 7 case, you can wipe them out entirely, and in a Chapter 13 case, you may be able to erase the tax liability or may only have to pay a percentage and can wipe out the rest.
Income taxes are dischargeable if:
- They are actually income taxes, not penalties or other kinds of tax
- The tax return was due more than three years prior to the bankruptcy
- You filed the tax return at least two years before the bankruptcy filing
- The IRS must have assessed the taxes at least 240 days prior to the bankruptcy filing date
- You did not file a fraudulent tax return or make efforts to willfully evade payment
These are very strict rules, and they are complicated. The attorneys at Jenkins & Clayman can review your tax returns, your tax bills and your payment history to determine whether your taxes are dischargeable in bankruptcy.
It Can Also Give You A Way To Pay Back Recently Assessed
1040 taxes are definitely income taxes. The irs only discharges tax debt in bankruptcy if the tax debt meets certain conditions. Chapter 7 bankruptcy only discharges income tax debt. Filing for chapter 7 or chapter 13 bankruptcy is a common way to eliminate or reduce tax debt. A bankruptcy case can wipe out older income tax debt that meets qualification guidelines. Other ways to get rid of tax debt. Chapter 7 can wipe out an obligation to pay income tax Owing to the irs and filing for bankruptcy are two serious The irs must assess the income tax debt at least 240 days before you file bankruptcy. When you can discharge tax debt if you need to discharge tax debts, chapter 7 bankruptcy will be the better optionbut only if the tax debt qualifies for The taxes must be more than three years old at the time the bankruptcy was filed. Beyond that, the space is not very well defined. Typically, you can’t eliminate income tax liability by filing for chapter 7 bankruptcy, but an exception exists.
The irs only discharges tax debt in bankruptcy if the tax debt meets certain conditions. The reason this step is important is because even if the tax debt cannot be included, bankruptcy may still make sense to get your other debts into a more Below, are some helpful tips and solutions to get rid of tax debt. In a few limited cases, yes. Chapter 7 can wipe out an obligation to pay income tax
Tax Debts In Each Chapter
Tax debts are typically priority debts in all chapter filings. They’re addressed and paid first when assets are liquidated in Chapter 7, and they must be included and paid in full in Chapter 12 and 13 payment plans.
Priority tax debts are not dischargeable in Chapters 11, 12, or 13.
You can receive tax refunds while under bankruptcy protection, but they will most likely be directed toward paying your tax debts.
Can Bankruptcy Get Rid Of Tax Debt
Bankruptcy attorneys all across Los Angeles and Orange County are asked by clients if they may be able to eliminate their tax debt by filing for bankruptcy. While speaking with a qualified Los Angeles bankruptcy lawyer is certainly the right place to start, most potential filers are unaware of the complexities involved.
From the outset, unfortunately, most people are unable to clear out their existing tax debt by way of bankruptcy.
Limits To The Automatic Stay
The auto-stay may be limited to 30 days after you file your case if you filed another bankruptcy in the previous year and voluntarily dismissed that case. This limit was put into place to prevent debtors from filing multiple bankruptcies just to hold their creditors at bay. If you filed a bankruptcy in the last year, you can request that the court extend the auto-stay, but you must first show the court that you filed your cases in good faith and not to abuse the auto-stay.
If you filed two or more bankruptcies in the previous year and voluntarily dismissed them, you will not be protected by the auto-stay, unless you prove to the court that you filed in good faith.
Additionally, a creditor can request relief from the auto-stay, meaning it can ask the court for permission to collect. Most commonly, this happens with secured debt related to real estate or cars, but the IRS can seek relief from the court if you committed tax fraud.
You Must Have Filed Your Tax Return At Least Two Years Ago
The tax return for the debt you wish to discharge must have been filed at least two years before filing for bankruptcy. The time is measured from the date you actually filed the return, not when it was due.
Additionally, if the IRS filed the return for you called Substitute for Return you never officially filed. Therefore, you do not meet this test.
How Chapter 7 Bankruptcy Works
Bankruptcy proceedings start when you file a bankruptcy petition with the bankruptcy court in the area where you live. When you file your bankruptcy petition, you must also provide additional information, including the following:
- Your assets and liabilities.
- Your current income and expenses.
- An explanation of your current financial situation.
- Current contracts or leases.
- Recently filed tax returns.
Fees are also due when you file for bankruptcy. They are generally a few hundred dollars depending on where you live. The fee may seem expensive, but it is certainly worth it if it allows you to discharge tax debt that could total many thousands of dollars.
Chapter 7 Bankruptcy: The Details
In Chapter 7 bankruptcy, the debtor liquidates or sells nearly all of their personal assets to pay off the balance of their debts. Certain property is exempt from liquidation. For example, you are entitled to keep a portion of the following up to a certain value:
- Your homestead
- Health aids
Once your items have been sold and the proceeds have been used to pay down your debt, the rest is discharged, meaning you do not have to pay it, and the creditor cannot continue to pursue you for it. This is generally intended for lower-income debtors to help give them a means to not stay in debt forever.
Tax Obligations In Bankruptcy
Felicity is a 37 year old unemployed woman from Dandenong in Victoria. She is currently single and has no children.
For 8 years she was a sole trader running a small business as a pastry chef. Felicity struggled to stay on top of her bookkeeping and bills. As a result, personal and business debts built up until Felicity had no choice but to close the business.
Felicity ended up filing for bankruptcy. At the time she had not lodged a tax return for the past 4 financial years.
Felicity listed the Australian Taxation Office as a creditor on her bankruptcy form. She did not know how much she owed because of her unfiled tax returns. She estimated on her form that it would be about $150,000.
AFSA contacted Felicity to talk about her bankruptcy. AFSA explained that Felicity still needed to lodge her overdue and future tax returns in the normal way. AFSA does not do this for her and bankruptcy does not remove this obligation.
AFSA explained that most ATO debts are covered by bankruptcy. This means they do not have to be repaid . The ATO would still be a creditor in the bankruptcy, which meant that if any money became available to pay creditors, the ATO would get a share.
However, any tax refund Felicity is entitled to during her bankruptcy may be kept by the ATO. The ATO would use this money to pay off some of her tax debt. This would reduce the ATOs claim against Felicitys bankrupt estate.
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.