When approaching the issue of discharging taxes in bankruptcy, it is best to refer to that old quote by Benjamin Franklin. There are two things that are certain in life, death and taxes. Bankruptcy is no exception and taxes are generally not dischargeable. However, it should be pointed out that under certain circumstances particular taxes may be discharged.
Situations Where Your Delinquent Tax Liability May Be Able To Be Discharged In Your Bankruptcy
Assuming that a person filed their tax return on the date that it was due and it was not filed as a fraudulent return with the intention of evading the tax, then your tax may be discharged whether you file a Chapter 7 Bankruptcy or a Chapter 13 Bankruptcy. The key is that the taxes must be more than three years old and have been assessed more than 240 days prior to the filing of your bankruptcdy. The date the return was due and the date of the filing of the bankruptcy are the time periods for determining the three years. This three year period is extended if a person filed an extension, in which case the due date of the return would be the extended deadline. In otherwords, the three year period starts upon the expiration of the extension. Also, there are other types of situations that can interfere with the calculation of the three year time period. Probably the most common is where a person was previously in a bankruptcy. The time between the filing of the case and the date it was closed is not counted, plus an additional 90 days is added to the three years. Other instances of extending the three years is where the IRS has been prevented from collecting taxes due to a request by the taxpayer for a due process heaaring. For instance, a person may have received a Notice of a Federal Tax Lien or a Notice of Intenet to Levy on some property that they own and wish to dispute the IRS's claim. This time period does not count toward the three years, plus an additional 90 days is added to the three years. Any time period in which a taxpayer assistance order was in effect is not counted toward the three year time period either. A taxpayer assistance order is an order issued by the National Taxpayer Advocate to resolve certain types of income tax problems being experienced with the IRS. These are normally situations where the action by the IRS has created a significant hardship. Not only must the taxes be more than three years old, but they also must have been assessed more than 240 days. Generally, the IRS will notify a person of any tax claim, which is usually the date the tax is assessed. However, the Internal Revenue Code permits an assessment to be made on the later of within three years of when a retrn is filed or on the last day the return was due. A new 240 day period comes in to play and allows an additional tax assessment if an amended return is filed. As it should be quite obvious, getting the timing of the filing of your bankruptcy right may be very important in being able to have any of your taxes discharged. A person can request a transcript from the IRS to help determine these time periods. Once these time periods have been determined, then you may want to consider delaying the filing of your bankruptcy to meet one of these deadlines.
Situations In A Chapter 7 Bankruptcy Where Taxes Are Not Dischargeable
The type of situations in a Chapter 7 Bankruptcy where taxes are not dischargeable are as follows: 1) any tax for which a tax return has not been filed or a fraudulent return was filed in an attempt to evade a tax, 2) any tax, even if a return was filed, that was filed late and was filed within two years of the date of filing of the bankruptcy, 3) taxes on income or gross receipts for which a return was last due within three years of filing of the bankruptcy or assessed within 240 days before the filing of the bankruptcy or not yet assessed, but assessable after filing of the bankruptcy, again measured from the date the return was due unless you get an extension, 4) if the IRS has a tax lien, even if the tax is considered discharged, any property that you own on the date of the filing of the bankruptcy will continue to be subject to the lien. However, any property acquired after the filing is not subject to the lien, 5) pre-petition interest is only discharged if the underlying tax is discharged, 6) post-petition interest on pre-petition taxes continues to accrue on non-dischargeable taxes and 7) penalties are discharged in a Chapter 7 if they are more than three years old.
Paying Non-Dischargeable Taxes Through Your Chapter 13 Bankruptcy Can Have Many Benefits
Most of the taxes that are not dischargeable in a Chapter 7 are also not dischargeable in a Chapter 13. The nice thing about Chapter 13 is that nondischargeable taxes are determined to be priority, less than three years old and also assessed within 240 days of the filing of your bankruptcy, can be paid over the life of your Chapter 13 Plan without any further penalties or interest accruing from the time of the filing of your petition to the completition of your Plan. Taxes are the type of debt that must be paid whether you file bankruptcy or not. By paying these particular taxes through your Chapter 13 Plan, the amount of taxes due can help you pass the means test. This figure can be deducted from your gross income in hopes of paying unsecured creditors ( credit cards, personal loans, etc.) nothing or very little. Upon the completion of your Plan, this tax debt would no longer be a financial burden.
State Taxes Are Often Dischargeable Much Like Your Federal Taxes
The rules regarding the dischargeability of federal taxes generally apply to any state income taxes, as well. In the event that your federal tax liability is ever adjusted, then you need to file an amended state income tax return. It is often necessary to have filed this return in order to have your state income taxes deemed discharged.
Be Leary Of Incurring A Debt To Pay Off Your Taxes
If you incur a debt to pay a tax that is deemed to be nondischargeable, then that debt is also nondischargeable in a Chapter 7 Bankruptcy. However, sometimes tracing any loan directly to the payment of the tax can be difficult and, therefore, may still be dischargeable. Even if the debt is determined to be nondischargeable in a Chapter 7 Bankruptcy, the debt may still be dischargeable in a Chapter 13.
Non-Income Taxes May Also Be Discharged In Your Bankruptcy
Up to this point, this discussion has been about discharging income taxes, but non-income taxes are generally dischargeable in either a Chapter 7 or a Chapter 13 bankruptcy. The key is that the event that cuased the tax liability is more that three years old at the time of the filing of your bankruptcy. For instance, excise taxes on transactions where a return has been filed and that are more than three years old prior to the filing of the bankruptcy are dischargeable. Also, excise taxes on a transaction where no return was required to be filed and that are more than three years old prior to the filing of the bankruptcy are likewise dischargeable. An exception to the dischargeability of non-income taxes are "trust fund" taxes or sales taxes. These are the type of taxes, such as sales taxes, that employers are required to withhold from employees' paychecks and turn over to the government.
Time Limits On Collecting the Delinquent Tax
Taxes are some of the most difficult debts to discharge. But there may be light at the end of the tunnel. The IRS generally has only 10 years to try and collect from you. So if more than 10 years have passed since that tax was assessed, the liability is wiped out. Of course, you must have filed a tax return and satisfied all of the other tolling requirements that have previously been mentioned.
If you find yourself in a difficult financial situation and a good portion of your debt is due to back taxes, then call Rodney Shepherd for a free consultation. A thorough review of your circumstances will be made and whether your tax liability might be dischargeable. Call today at (412) 471 9670 to schedule an appointment.