It’s that time of year again – TAX TIME. I know you love it, especially if you owe or are going to owe the IRS. If this is you, you should know that some back taxes can be wiped out in bankruptcy. Of course, not all taxes can be wiped out. For example, payroll taxes and sales taxes associated with your ownership of a small business cannot be wiped out in bankruptcy. However, even if you cannot get rid of your taxes, Chapter 13 bankruptcy can stop penalties and interest on them while giving you time to repay, and reducing the amount available for your other creditors.
Getting rid of personal income tax debt in bankruptcy
Income tax debt can be discharged (or wiped out) in bankruptcy if 5 conditions exist:
1. The taxes were due at least three years ago: keep in mind the due date is the focus of this requirement. It is normally April 15, but can be a different date if you filed an extension. As of the date of this article (April 5, 2010), income taxes from taxable years 2005 and earlier meet this requirement. In 10 days (after April 15, 2010), income taxes from 2006 will also be included.
2. The taxes were from a return filed at least two years ago: the focus here is the actual filing date, not the due date. This is one good reason to file your tax return if you haven’t done so already.
3. The taxes were assessed at least 240 days: this requirement is confusing even to lawyers. Basically, most tax assessments occur when you file a return. However, if you have had an audit or IRS proposed assessment which has become final, that is your assessment date.
4. The tax return was not fraudulent: This should be no surprise because it is like other fraudulent debt in bankruptcy – you can’t get rid of it!
5. You are not guilty of tax evasion: similar to fraud, you cannot be guilty of any intentional act of evading the tax laws in order to get rid of them in bankruptcy.
For most people, the first two are the real hurdles. However, all of the requirements must be met in order to get rid of the debt. So, if you think your tax debt satisfies these requirements, you should consult a bankruptcy lawyer to make sure.
I know – encouraging you to see an attorney is a mandatory component of my blog, and is in my best interests as an attorney. But it’s in your best interests too!!
Other taxes
The requirements laid out in numbers 2 (if the taxes require a return), 4, and 5 apply to all taxes. Certain taxes, such as property taxes, excise taxes and customs duties, can be wiped out if they meet these conditions and are old enough (different time requirements for different taxes). If you owe these types of taxes, you should consult a bankruptcy attorney to discuss what timeframes apply to your specific tax liability.
There I go again!
Small business owners – payroll taxes and sales taxes
Any taxes which are to be withheld (such as payroll tax) or collected (such as sales tax) cannot be wiped out in bankruptcy. While these taxes are generally incurred at the corporate level, owners and corporate officers can be personally liable for these taxes.
LET ME RESTATE THAT IMPORTANT POINT – If you are a small business owner, you are very likely going to be personally liable for sales taxes and payroll taxes, and bankruptcy cannot remove your liability for these taxes! These facts mean you should prioritize paying them ahead of all other creditors.
Bankruptcy can help you deal with back taxes even if they cannot be wiped out
If you have taxes which cannot be wiped out in bankruptcy, you should explore all options. While these options include negotiating with the IRS (e.g., offer in compromise, payment plan, uncollectible status, etc.), they also include bankruptcy.
First, bankruptcy can get rid of other debt, enabling you to pay your back taxes.
Second, in Chapter 13 bankruptcy, you can stop interest and penalties on back taxes and pay them down over a three to five year payment plan. While this means paying the taxes, it may be your best option for dealing with them. This is especially true if you have other debts which can be wiped out in bankruptcy because Chapter 13 will let you pay down back taxes prior to paying anything toward debts which can be wiped out in bankruptcy (i.e., credit cards, medical bills, etc.). This often will reduce the amount these other creditors will get , which may be nothing after you pay your taxes.
If you owe the IRS, you should definitely take the time to understand your rights in bankruptcy. You may be able to get rid of the tax debt completely. If not, Chapter 13 bankruptcy can still stop penalties and interest on your back taxes while giving you three to five years to pay, and reducing the amount you have to pay your other creditors.
All in all, this is worth a call to a bankruptcy attorney!