If you owe tax debts, there are a number of ways to solve the problem and keep the taxing authority from taking action against you. For many people, bankruptcy can end the stress associated with owing taxes by either wiping out the debt or allowing you to structure a meaningful repayment plan.
Income Taxes And Bankruptcy
Under the U.S. Bankruptcy Code, you can discharge (wipe out) your liability for income tax debts so long as they are considered non-priority debts. In order to be considered a non-priority debt, the liability must meet the following rule:
- Your tax returns must have been due three years or more before the petition was filed;
- Your tax returns have to have been filed more than two years before the petition;
- The tax you owe must have been assessed against you by the government for at least 240 days before the case is filed;
- Your tax returns must have been truthful and not fraudulent; and,
- You must not have been intentionally attempting to evade or defeat the tax when you failed to pay.
For example, let’s say you owe money for income taxes for the year 2009. Those tax returns were due on April 15, 2010 unless you received an extension. Therefore, the first part of the test would be satisfied on April 16, 2013 in the absence of an extension.
If you filed your 2009 tax return after April 15, 2011, however, the second part of the test would not be met. And even if you filed your return before that date, if the government assessed the tax due within 240 days of the filing date of the bankruptcy case, the third part is not met.
For these reasons, it’s best to get a copy of your tax transcripts before you come to see me.
Withholding Taxes And Bankruptcy
Withholding taxes, such as the income and social security taxes withheld by employers from their employees, can’t be discharged in a Chapter 7 bankruptcy and are not going to be considered as non-priority debts. The employer’s portion of the withholding taxes, however, can be considered to be non-priority debts if the return was due and filed timely (including extensions) more than three years before the bankruptcy filing.
Other Types Of Tax Debts
Excise taxes such as estate and gift taxes, gasoline and special fuel taxes, wagering and truck taxes and state sales taxes, and custom duties are treated the same way as income taxes. The same rules apply.
What If The Tax Is Not A Non-Priority Debt?
If the tax debt doesn’t meet the test for dischargeability, it can still be handled through a Chapter 13 bankruptcy. This will involve paying the entire debt in full through a court-approved repayment plan, but the good news is that interest on all unsecured tax claims in bankruptcy stops running upon the filing of the case. Unsecured priority taxes are paid, then, without interest accruing or continued penalties after the filing of the Chapter 13 bankruptcy.
If You’ve Got Tax Debts, We Should Talk
There are other nuances when it comes to tax obligations – things like tax liens, unfiled returned and offers-in-compromise can throw a monkey wrench into the works. To get a trained eye on whether bankruptcy will solve your tax problems, set up a free, no-obligation phone consultation. You can also give us a call at 866-787-8078 during normal business hours.