Can Bankruptcy Help Me With Tax Problems?
Older Taxes Can be Discharged if They Meet Certain Rules
By Mark E. Henze
“The only things certain in life are death and taxes.” We’ve all heard this slogan, but sadly it’s only partially true. The only thing certain in life is death. While paying taxes is an inevitable part of life, bankruptcy can be helpful in many situations. Some taxes can be discharged in a bankruptcy and others can be effectively managed or paid through a bankruptcy plan while decreasing the amount of interest and penalties owed.
First, a few general rules.
1. Dealing with taxes in a bankruptcy can be tricky. Remember that taxes are paid to the government and the government controls the rules! Despite what is stated herein, it is highly recommended that you seek experienced and professional legal counsel when it comes to taxes in bankruptcy. The rules DO change regularly!
2. The Trustee in your bankruptcy case will want to see copies of your last filed tax return and may ask to see copies of earlier returns should they be relevant to any investigation or concerns he/she may have. Be sure to provide copies of these to your attorney in advance. Your case may be dismissed if these returns are not provided. If you do not have to file returns, you may be required to sign a legal affidavit stating this. If you were required to file, it may be necessary to postpone filing your bankruptcy case while you get these returns prepared. However, if you have not already filed these late returns with the IRS, DO NOT FILE them with the IRS until you have first consulted with your bankruptcy counsel.
3. A tax normally cannot be discharged or managed through a bankruptcy unless the tax return was filed and was filed timely. It is ALWAYS a mistake to fail to timely file your return ... even if you will owe taxes that you cannot pay. First, if a return is not filed or is filed late, you will immediately lose a number of rights that might have beneficial to you.
4. Bankruptcy cannot help if the return that was filed was fraudulent or evidences a willful attempt on your part to evade a tax.
5. If you own a business and withhold “trust” taxes taken from an employee (eg. the part of the Social Security tax that was taken from the employee’s share of his/her paycheck), those taxes may almost never be discharged. However, a Chapter 13 payment plan may be a good way to manage these taxes, reduce penalties and interest and simply get them paid off over time.
6. The more recent the tax, the more difficult it is to discharge.
Income Taxes are the easiest to discharge if they are for a tax year that is more than three years past. For example, if you file your bankruptcy case on April 16, 2013, your income taxes for 2010 (due one day earlier), 2011, and 2012 are simply NOT dischargeable. Yet, if you filed for an extension of time to file a return, the three (3) year period for that tax starts on the day that your extension required your taxes to be filed (usually October 15) … not April 15. Likewise, if you fought the tax in tax court or made an "offer & compromise" with the IRS, the time that was spent fighting or attempting the offer & compromise is added to the 3 year period before the tax becomes dischargeable. Additionally, if you failed to file your return timely, the tax cannot be discharged (regardless of how old the tax is) unless you eventually did file the return (before the IRS filed one for you)… and it was filed at least two (2) years before your bankruptcy case was filed. There are a few further requirements as well (such as the 240 day assessment rule, and dealing with later discovered or audited amounts due) that should be discussed with your bankruptcy counsel. Yet, generally, as of April 16, 2015, most properly and timely filed 2011 income taxes owed would become dischargeable!
If you owe a tax that cannot be discharged, that amount becomes a “Priority” debt that will be paid out of any property that is taken from you (if any) by the bankruptcy Trustee. These priority debts (also including child support and alimony) are paid before any other creditors are paid. If you file a Chapter 7 case and no property is taken from you, you will still owe these taxes (plus accrued interest and penalties). However, you can also file a Chapter 13 case and make small payments to the court over 3 to 5 years. These payments will go to pay these taxes before anyone else. So, for example, if you owe $5,000 in non-dischargeable taxes and $100,000 in credit cards, you may be able to make Chapter 13 payments of $100 per month over 5 years and nearly all the money will go to pay these priority taxes and little will go to the credit cards. Remember that these are taxes you would otherwise have to pay anyhow … even if you didn’t file the bankruptcy case.
Finally, there are many different kinds of taxes. Some taxes are secured against assets … such as real estate taxes, certain property taxes, and taxes where the taxing agent has begun collection efforts and has filed a “lien.” Generally, secured taxes must be paid if you intend to keep the asset that secures the tax. (eg. If you wish to keep your real estate, the property taxes must be paid). However, even though the tax will not go away with a Chapter 7 bankruptcy case, you may be able to use a Chapter 13 payment plan to catch up on these back taxes so that you do not lose the house or other secured asset.
The above is a simply description of some of the issues pertaining to taxes and bankruptcy. Be sure to consult with legal counsel before relying on this information as the rules DO change!
For a free initial consultation, call Henze & Associates, P.C. at