Law Offices of David Enos
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Amarillo Bankruptcy Tax Attorney
Federal Bankruptcy Law can put you on an even playing field with the IRS
While the general rule is that IRS taxes can not be discharged in bankruptcy, some back taxes that you owe to the IRS can be wiped out in bankruptcy. In order to be eligible to discharge a tax debt, there are five rules that must be satisfied.
You can discharge IRS taxes in bankruptcy only if all of the following conditions are true:
- The taxes are for income taxes only. Taxes such as payroll taxes, trust fund taxes, sales tax or fraud taxes cannot be discharged in bankruptcy.
- You have not committed fraud or willful tax evasion. You can't discharge tax debt if you filed a false or fraudulent tax return or willfully attempted to evade paying taxes. For example, if you did not report all your income, you cannot eliminate the debt after getting caught.
- The debt must be at least three years old from the date it was due. In order to discharge the tax debt, the bankruptcy can't be filed until three years after the original due date of the tax. For example, if a tax was due from a 2006 tax return, the due date of that tax liability would be April 15, 2007. In this example you would have to wait until April 15, 2010 to file the bankruptcy in order to be eligible to discharge the IRS tax debt. Many times, you must be careful to wait the appropriate time period in order to ensure that the tax debt will be wiped out.
- The tax return must be filed on time and two years before the bankruptcy. To be eligible to discharge the debt, you must have filed a tax return for the IRS debt you wish to discharge at least two years before filing for bankruptcy. Thus, even if the debt is over three years old, if you filed the return late and two years has not yet passed, then you cannot wipe out the IRS tax debt. Also, if the IRS filed a substitute return for you or your filed your tax return late this does not count and is treated as if you never filed the tax and is not dischargeable.
- The IRS must have assessed the income tax debt at least 240 days before you file your bankruptcy petition. The IRS can extend this time period due to suspended collection activity because of an offer in compromise or a previous bankruptcy filing.
Federal Tax Liens are not Discharged
A bankruptcy may relieve you of personal liability on a tax debt but it will not discharge a properly filed tax lien. The IRS cannot collect from you personally for the debt, but the lien will remain on any assets so that you will not be able to sell these assets without satisfying the outstanding lien. Depending upon the lien and when filed, there may be other options to eliminate the lien.
Discharging Tax liens in Chapter 13 Bankruptcy
The same five rules that render an IRS debt dischargeable in a Chapter 7 bankruptcy make the IRS debt general unsecured debt in a Chapter 13 case. This means that the IRS debt will be treated as general unsecured creditors such as credit cards. Therefore, in a chapter 13 bankruptcy if the 5 conditions are satisfied, then the debt is treated as general unsecured and will be paid out and treated the same as other general unsecured creditors. Accordingly, if the plan proposes to pay unsecured creditors only 5% of the outstanding amounts, then the general unsecured claim of the IRS for income tax will only be paid 5%. You can also restructure the IRS tax debt that is not dischargeable over 60 months in a Chapter 13 bankruptcy without interest or additional penalties.
Timing is Critical
If the tax obligation satisfies all of the five criteria discussed above, the tax can be discharged in a bankruptcy. The failure, however, to satisfy any one of these criteria makes the taxes non-dischargeable in all chapters of bankruptcy. In many cases, the time requirements of the five rules can be satisfied by simply waiting to file the bankruptcy. On the other hand, not waiting long enough to file the bankruptcy may cause you not to satisfy one of the five rules and therefore render the tax debt non-dischargeable. It is important to consider these five rules carefully and consult with a bankruptcy attorney to determine your options.
As an experienced Amarillo bankruptcy attorney, David Enos has discharged hundreds of thousands of dollars of IRS taxes and can help ensure that your bankruptcy filing is both thorough and also maximizes the benefits of bankruptcy for you and your family so you can have a “fresh start.”
If you would like to discuss your tax options with an Amarillo bankruptcy lawyer, please contact bankruptcy attorney David Enos for a free consultation today. (806)372-7730
Information on this website is based on general principles of law. They may not apply to your situation. Nothing in this article constitutes legal advice and no reliance should be placed on the legal principles set forth in this website. This is why you should personally consult with attorney David Enos about your case. See the Mandatory Bankruptcy Disclosures.