Be wary of commercials that claim to help you get rid tax debts through bankruptcy filings. It’s not always as simple as you think. Most tax debts cannot be eliminated in bankruptcy. These taxes will be due at the close of a Chapter 7 bankruptcy. They can be repaid in full by a Chapter 13 bankruptcy repayment program. Learn more about bankruptcyhq.com.
- What happens if you can pay off your tax debts?
- What happens to federal liens?
- Chapter 13: How To Manage Your Tax Debt
Learn about the advantages and disadvantages of filing taxes returns either before bankruptcy or after it.
When You Can Discharge Tax Debt
- The taxes are income taxes. There are no other ways to eliminate taxes than income such as payroll taxes and fraud penalties.
- You did not commit fraud or willful theft. If you’ve filed a false income tax return, or tried to evade paying taxes through filing false Social Security numbers on tax returns, the bankruptcy process won’t work for you.
- The minimum term of the loan must be three years. Three years before filing bankruptcy, the original tax return must be filed.
- You have already filed your taxes return. The tax return that you wish to file must be filed at least 2 years prior to bankruptcy filing. If you file a late return, the IRS will file a substitute return on your behalf. The late return will not allow you to discharge the tax. Some courts will allow you the payment of tax debt if you fulfill other requirements.
- You’ve fulfilled the “240-day rule.” The IRS must have received the income taxes debt assessment at minimum 240 calendar day before you file bankruptcy petition. If it hasn’t, it might not be done. (This time limit may be extended for bankruptcy filings, or offers in compromise.
The jurisdiction may have additional requirements. You must file your tax return by the deadline in the ninth district. You could be automatically discharged if you fail to file your tax return on time. Chapter 7 can also render it unassailable if the tax debt is not dispenseable.
You Can’t Discharge a Federal Tax Lien
You might win bittersweet if your taxes are discharged in a Chapter 7 bankruptcy proceeding. Why? Tax liens that have been in the past won’t be erased by bankruptcy. Chapter 7 bankruptcy may be used to discharge your personal tax obligation. The IRS cannot go after your bank accounts and wages. You may have had tax liens placed on your property by the IRS in the past. In order to sell the property or transfer the title, you will have to pay off the tax lien.
Chapter 13 Bankruptcy – How to Manage Tax
After realizing that Chapter 13 bankruptcy may be an option for you to reduce your tax debt, filing your tax return might not seem so hard. These are the benefits:
- Dischargeable taxes are generally older than 3 years in tax year. This is based on your disposable income after you deduct reasonable and necessary expenses from the salary.
- There are no additional penalties or interest for discharging taxes. However, you will be charged interest on the non-dischargeable.
- You can use the Chapter 13 plan to resolve IRS tax liens.
- The IRS is required to follow your plan, provided you include all your income tax and that your tax obligations and returns post-petition are current.
You must pay any non-dischargeable taxes (generally those incurred during the last three tax years) within the three to five-year Chapter 13 plan. After the plan ends, you’ll be able repay your taxes as well as any other debts.
Chapter 13 allows you the ability to pay off credit card debts incurred as a result of non-dischargeable taxes. Learn more about Chapter 13 taxes debts
Do I file for bankruptcy after or before taxes?
You will not gain any advantage if you delay filing your income taxes until after bankruptcy. It is crucial to keep current with your Chapter 13 matter.
Chapter 7 Bankruptcy & Refunds
The trustee who will be handling your Chapter 7 case will need to see the most recent tax returns. It does not have to be the latest tax return. However, the trustee may request a written explanation.
The trustee will evaluate the income you declare on the return relative to the amount listed on your bankruptcy paperwork. The trustee will verify that you have the right to protection (exempt) if you request a refund. If you are not entitled to a refund, the trustee will request that you return it to them. They will then give it to your creditors.
Many people will use their bankruptcy return to pay for necessities (such as living expenses). If you plan to use your return for living expenses, it’s smart to keep records of every expense.
Chapter 13 Bankruptcy & Returns
Although it is important to keep your tax records current in order to file Chapter 13 cases you have some flexibility. Each filer must submit copies of all four tax returns in order to meet the Chapter 13 trustee. The trustee might request a letter from you if you do not have to file any returns. Some local courts might have additional rules to protect documents.
Your case could be at risk if you fail to file your IRS returns before the 341 meeting.
- A motion. The trustee will ask you to give him a time limit within which you must submit your returns. If you miss this deadline, your case will be automatically dismissed by the court and you will not have an opportunity to present your case in front of the judge.
- It is possible to replace the original. Your past income may give the IRS cause to file “best estimates” claims. Problem: The IRS estimates almost always exceed what you would owe even if your return is correct.