Depending on your particular circumstances and which Chapter of Bankruptcy you may be eligible to file, you may be able to use a Bankruptcy to discharge certain tax liabilities. Both Chapter 7 Bankruptcy and Chapter 13 Bankruptcy can address taxes and do so quite differently. Depending on a few key factors and the type of taxes you owe will determine the Chapter that may choose to file.
You may be able to use a Chapter 13 Bankruptcy plan:
- To pay off a tax lien if the claim is secured,
- To pay the tax principal and interest to the date your individual debt adjustment case is filed (but not beyond) if the claim is entitled to priority, or
- To discharge the tax debt if it is a general unsecured claim.
Chapter 7 Bankruptcy may allow you to discharge old tax debts in certain circumstances.
Most taxes are generally considered “non-dischargeable.” In limited circumstances, a Bankruptcy Court can discharge taxes and any penalties imposed.
A Bankruptcy Court can only discharge your federal income tax debt if:
- You filed your tax return for the applicable tax year;
- You filed the return at least two years before your bankruptcy;
- Your taxes for the applicable year were due at least three years before your bankruptcy; and
- The IRS has not assessed your liability for the past-due taxes within the 240 days preceding your bankruptcy (i.e. assessed more than 240 days out or not at all)
Unfortunately, the discharge will not prove helpful if the IRS has filed a lien on your property to secure your tax payments. The lien remains even though the Court can discharge your personal liability. The automatic stay stops the IRS from issuing a lien or levying against (seizing) your income or property. The effect of the Federal Tax Lien is to encumber the property and make it impossible to sell the real estate without first taking care of the lien from the sale proceeds. Unlike a judgment lien, a Federal Tax Lien can be imposed prior to a court ruling. Federal Tax Liens are a very powerful IRS enforcement tool.
One of bankruptcy's most alluring features is something called the automatic stay. The moment you file for bankruptcy, the automatic stay stops all creditors and bill collectors from collecting their debts which includes the IRS. This means the IRS cannot issue a tax lien or seize your property. The automatic stay does have its limits, and the IRS can continue an audit, issuance of deficiency notices, demands for payment of an assessment, or a demand for a tax return, issue a tax assessment or demand payment of such an assessment.
If you have significant tax debts you may be able to utilize bankruptcy in order to buy time and force the IRS to accept a payment plan in Chapter 13 Bankruptcy. A plan that is most likely to be much better than any plan the IRS would force on you. If a Debtor has a dispute or there is some uncertainty as to how much the Debtor owes, the Bankruptcy Court is an excellent forum for obtaining a judicial determination of the amount of the liability as well as what can and cannot be discharged. This is especially the case in situations where the taxpayer cannot obtain access to the more common methods of formal court review.
Property taxes are technically dischargeable if they were due more than a year before you filed for bankruptcy. However, the discharge is generally of no effect because the Court cannot discharge the lien on your property.
The Court cannot discharge business-related taxes such as payroll, excise, customs duties or sales & use taxes. These are most always business related and although they cannot be discharged in a bankruptcy they can often be paid in full through a bankruptcy plan under chapter 13 or chapter 11. Other taxes like sales tax, poll taxes, and use tax are usually not dischargeable either but can also be addressed if paid in full through a bankruptcy plan under chapter 13 or chapter 11.
Absent an exception that makes a tax dischargeable, Chapter 7 will have no effect on your tax debts. Chapter 13 will allow you pay your tax debts over the course of your plan and a Chapter 13 bankruptcy will also stop interest from accruing and penalties from being imposed on your past due amounts.
Income Tax Returns
Previous to October 17, 2005 there were no requirements in the Bankruptcy Code having to do with income tax returns.
Under The New Bankruptcy Law Debtors must now file, along with their petition and schedules, a copy of their most recent income tax return. Additionally, if a creditor asks for a copy of the return, Debtor’s are required to provide them one. Debtors must provide a copy of his or her latest tax return or a transcript at least 7 days before the meeting of creditors or the case “shall” be dismissed. All tax returns must be filed for a plan to be confirmed in Chapter 13. The debtor must file all returns from 4 years prior to the Chapter 13 filing.
Since the law is constantly changing, and no brief article can take the place of competent legal counsel you should not rely on this article, but instead consult an experienced attorney. The Law Offices of R.J.Atkinson,LLC has extensive experience in the area of Bankruptcy and Tax and has helped over 1000 people to address their debt through bankruptcy.
If you reside in Houston, Austin, San Antonio, or Dallas and have questions about the implications of bankruptcy and taxes please contact The Law Offices of R.J.Atkinson,LLC at 210-805-9909 for a free initial consultation to discuss your legal options in Bankruptcy. Don’t lose everything.
