There is a life after bankruptcy, and it includes taxes. Since bankruptcy and tax laws are both complex, it is critical to know how filing for bankruptcy may impact previous tax debt as well as future commitments to the IRS before you file.
The Bankruptcy Code requires a debtor to file an individual tax return or request an extension, per the IRS Publication 908 Bankruptcy Tax Guide and this return MUST be provided to your case Trustee. The bankruptcy case may convert or dismiss if this does not occur.
Bankruptcy and taxes can make anyone feel uncomfortable, especially during hard times. In this article, Acker Warren P.C. will share some facts about bankruptcy and taxes so you can prepare for what to expect and hopefully reduce some stress.
Will Bankruptcy Wipe Out Tax Debt?
Different bankruptcy chapters exist, and the sort of debt you owe might impact which chapter you must file and how your bankruptcy case will proceed. The bankruptcy court may compel you to sell some of your assets to pay off some of your debt. In other cases, before the remaining sum of your debt can be discharged, the court may create a payment plan with you to pay off creditors for a specific timeframe.
If your debts include tax debt, you may be eligible for some or all of the debt to be discharged depending on the type, age, and certain other criteria of tax debt. To begin with, neither taxes one deliberately sought to avoid nor the penalties incurred as a result of avoidance are dischargeable in bankruptcy. Tax debt resulting from Fraud is also non-dischargeable. In addition, even if there is no fraud, income taxes are only dischargeable in certain instances.
Three elements need to be met for tax debt to be dischargeable:
- Taxes cannot be discharged in bankruptcy until three years have passed after they were due.
- To be discharged, you must have filed a tax return for the tax you owe — and you must have submitted it timely under 5th Circuit Court of Appeals decisions.
- Taxes must have been assessed during the previous 240 days before you filed for bankruptcy. So, if you were audited and your taxes were reassessed after Tax Day, you’d have to wait another 240 days.
Sadly, just because your taxes get discharged does not mean your tax liens are gone. If the IRS registered the tax lien before you filed for bankruptcy, it would stay on your property, making it hard to sell it until you pay off the debt.
Regardless of which chapter of bankruptcy you file, unless you request an extension, all tax returns due after you file must be filed timely. Failure to file or request an extension may result in the dismissal of your bankruptcy case or conversion to a different kind of bankruptcy.
Is there a way to avoid bankruptcy?
If you are considering bankruptcy because of unpaid tax debt, contact a competent Bankruptcy Attorney to review your options.
Engaging in an installment arrangement with the IRS, negotiating a settlement with the IRS to defer collection operations, or entering an offer in compromise are some options available in addition to bankruptcy. An arrangement between you and the IRS that permits you to pay a lower amount is an offer in compromise. The Attorneys at Acker Warren, P.C. have a complete understanding of the various avenues available to settle your tax debt and can help you make the best decision possible to resolve outstanding tax debt. Contact us today so that we can review your options.
With Acker Warren P.C., you can get exceptional legal services that go beyond the courtroom. Through the financial system and chapter 13, chapter 11, and chapter 7 bankruptcy proceedings, we’ve helped thousands of customers get debt relief.