Contrary to popular belief Personal Income Taxes frequently can be discharged in Bankruptcy, including Chapter 7 and Chapter 13.
There are certain qualifications, as itemized below:
- You have to file your income tax returns. At times the IRS files returns when an individual has failed to file. Another name for this is Service Filed Returns. The amounts due on IRS filed returns are not dischargeable.
- The filing must be an honest filing. Fraudulent tax returns do not create dischargeable taxes. Neither does a willful attempt to evade taxes.
- The tax must be 3 years old when due. Generally the due date is April 15th. However, if April 15th falls on a Saturday or Sunday the due date will be the 16th or 17th. If you have filed for an extension of the filing date, the due date is October 15th, or the 16th or 17th.
- The tax return must have been filed more than 2 years before the date on which you file the Bankruptcy.
- If the IRS has reassessed your taxes, it must have been done more than 240 days before the filing.
- There has not been a “tolling.” Written agreements with the IRS and a prior filing in Bankruptcy can toll the above time period to make otherwise dischargeable taxes into non dischargeable taxes.
When I explain the above mentioned rules to clients they frequently look at me glassy eyed. I don’t blame them. The rules are legalistic and confusing.
Let’s say the date you are meeting with your lawyer is April 16, 2014. You owe $5,000 for your 2010 taxes. Issues to be determined: Did you file your income tax return on time? Or, were they filed late? Or, did you file for a 6 month extension?
OK. You filed your taxes for 2010 roughly on time in 2011. The tax due is more than 3 years old and you filed the return more than 2 years ago. And, of course, you filed honestly, maybe through a tax preparer. The IRS never filed an assessment. You have never entered into a written and signed “offer and compromise” or other agreement.
Since neither April 15, 2010 nor April 15, 2014 falls on a Saturday or Sunday, you can file a Chapter 7 and be able to discharge this debt, including any interest and penalties that have been added on to the original $5,000.
If your option is to file a Chapter 13 the IRS debt for 2010 is a general unsecured debt that can possibly be paid a low dividend.
INTEREST AND PENALTIES
Chapter 7: If the tax will be discharge so will the Interest and Penalties. If the tax will not be discharged neither will the interest nor penalties.
Chapter 13:. Penalties will be treated as a general unsecured debt. Thus that portion may be repaid at a small dividend (like ten cents on the dollar.)
IRS TAX LIENS AND CHAPTER 7
If the IRS has filed a lien on your personal property and/or real estate, you have a problem. Even if the debt is dischargeable the lien remains. As to personal property that usually does not pose a problem unless the property is valuable. But if you own a home and you want to keep it then it is a real problem. IRS liens have a life of 10 years and the lien can be renewed. Most liens go through Chapter 7 unaffected so even at the end of your Chapter 7 case, the lien would still have to be addressed.
IRS TAX LIENS AND CHAPTER 13
The same rules apply. However, IRS liens can often be avoided in whole or in part depending on the value of the property. If the house is worth less than is owed on the mortgage, the IRS lien is not worth anything. The Chapter 13 Plan can then be used to get rid of the IRS lien.
For example, If the market value of the home is $100,000 and the mortgage (s) debt and real estate taxes are more than $100,000 the lien can be avoided in its entirety. Assume, however, there is a tax lien of $50,000 (and the taxes are dischargeable) and the value of the home is $100,000 while the mortgage and real estate tax debt is $90,000. Then, what? A Chapter 13 can be constructed to pay $10,000 of the tax lien in full and the remaining $40,000 as a general unsecured debt repaying, hopefully, a very low dividend.
Another advantage to a Chapter 13 is when there are non dischargeable tax debts and/or tax liens that cannot be avoided: you can repay the IRS debts over a period of up to 5 years and put a halt to the interest and penalties.
THE NEXT STEP
If you are considering dealing with personal income tax debts through a Bankruptcy please call us. We are here to help and our consultation is free.
ROBERT J ADAMS & ASSOCIATES
Serving consumers and homeowners for 35 years.
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