Bankruptcy and Tax Debt
Income tax debts may be dischargeable under Chapter 7 or Chapter 13 of the Bankruptcy Code. There are several criteria that must be met in order for taxes to be dischargeable.
The due date for filing a tax return is at least three years ago.
The return was filed at least two years ago.
The taxes were assessed at least 240 days ago.
The tax return was not fraudulent.
The tax payer is not guilty of tax evasion.
Return Due At Least Three Years Ago
Example: 2009 tax return must be filed on or before April 15, 2010. The three year period begins to run on April 15, 2010 (assuming no extension was filed).
Return Filed At Least Two Years Ago
Example: 2009 return wasn’t filed until 2011. Even though the three year mark is met these taxes would not be dischargeable until 2013.
Tax Assessment At Least 240 Days Old
Example: 2009 taxes were filed in 2010, and at the time of filing the IRS assessed the amount owing. On March 1, 2012, the IRS audited the taxes and assessed a new amount. In this scenario the three year period ran on April 15, 2013 (assuming no extension was filed), the two year period is met because the taxes were filed on time. However, an amended return or an audit can result in a new assessment, triggering the 240 day time period. In this scenario the 2009 taxes wouldn’t be dischargeable until 240 days after March, 2012.
Tax Return was Not Fraudulent
The tax return cannot be fraudulent or frivolous.
Taxpayer Not Guilty of Tax Evasion
The taxpayer cannot be guilty of any intentional act of evading the tax laws.
Some Tax Debts Not Dischargeable
Tax debts that arise from unfiled tax returns are not dischargeable. The IRS routinely assesses tax on unfiled returns. These tax liabilities cannot be discharged unless the taxpayer files a tax return for the year in question.
Employer related taxes “trust fund taxes” are not dischargeable in bankruptcy.
Chapter 13 – An option for non-dischargeable tax debt
If a tax debt is non-dischargeable, a chapter 13 bankruptcy can be a good option. This allows a debtor to pay the taxes over a 5 year period. If there is no tax lien in place, no interest will accrue on the taxes once the bankruptcy is filed.
Example: the debtor owes taxes for 2010, 2011, and 2012, totaling $16,000.00, and there is no tax lien filed. The debtor would have to pay $267.00 per month for 60 months to get the taxes paid off, in addition to administrative fees associated with a chapter 13.
A chapter 13 repayment of the taxes is generally a smaller payment than an installment agreement. This is due to the fact that no interest accrues once the bankruptcy is filed.
A bankruptcy can solve tax problems, whether through a full discharge or a manageable repayment plan. A skilled bankruptcy attorney should be consulted to determine if, and when, taxes are dischargeable. This is imperative to avoid filing the bankruptcy prematurely.