Bankruptcy & the IRS

Filing for bankruptcy might be a solution to your tax problems. There are certain circumstances which allow for full or partial discharge of income taxes. In addition, in a chapter 13 you can pay the potion of the tax debt that cannot be discharged over a period of up to five years.

 

Depending upon whether you file a Chapter 7 or a Chapter 13 petition, you may be able to wipe out some if not all of your back income tax liability.

 

As a general rule, past due taxes related to unfiled or late returns and the related penalties cannot be discharged although there are exceptions.

 

If you are filing a Chapter 7 petition, generally, you can wipe out federal income taxes as long as ALL of the following criteria are met:

 

There is no fraud. If you filed a fraudulent return(s) or tried to avoid paying your income taxes, you will not be able to discharge the obligation.

 

That the tax liability in question is for a tax return filed at least two years prior to the bankruptcy.

That they were income taxes and not payroll or trust fund taxes.

 

That the actual tax return was due in excess of three years ago.

DSC00213

DSC00213 (Photo credit: BankruptcyLawyerStL)

 

That any tax deficiencies (that were assessed on those prior returns) were actually assessed at least 240 days prior to the filing of the petition in bankruptcy.

 

Lastly, that the IRS had not filed a tax lien for these back taxes on your assets. If there is already a lien, the lien survives the bankruptcy and the government can still seize the liened property to collect the tax debts.

 

Income taxes for the last 3 years are not dischargeable. If you file a chapter 13 bankruptcy case, you need to file your tax return or obtain an extension for the prior three years. It is good practice and actually required by local rule in St. Louis, Missouri, that every debtor lists the IRS and MODOR (Missouri Department of Revenue) as creditor on the petition. MODOR will then check if all tax returns within the last three years have been filed, and if not, file a motion to dismiss. You have then time to either file the tax returns or obtain an extension to file. In the East St. Louis area, the trustee might ask for copies of the tax returns for the last two or three years. In either chapter, you must provide a copy of the last filed tax returns to your trustee. If you are not required to file a tax return, you bankruptcy attorney will provide you with an affidavit that you don’t have to file a tax return.

In the event you decide to file a Chapter 13 bankruptcy petition, your back taxes usually have to be repaid under a payment plan. The usual time period is 3 to 5 years. However, if your income is less than your state’s median income, you can choose the length of the plan, if you are above median, your plan has to be 5 years. Generally, even with a payment plan you usually end up paying less than you owe.

 

As you prepare your payment plan proposal, the plan must be considered reasonable. It will be provided to the judge, who will be the person to ultimately approve it. Creditors and the IRS normally do not show up at the hearing. In calculating your payments, take into account the fact that interest and penalties stop accruing upon the filing of your Chapter 13 petition. The exception is for secured taxes (taxes that are secured by a tax lien).

It should be noted here that the automatic stay which comes into play when you file a bankruptcy petition applies to the IRS with respect to debts incurred prior to the petition. The IRS rarely applies to remove this automatic stay.

 

It should also be noted here that if you filed for an Offer in Compromise it will affect your time periods. The 240 day minimum time period, as mentioned above, begins from when the IRS disapproved the offer, plus 30 days.

 

In summary, if you are considering bankruptcy to get out from under a large tax burden, seek the advice of a qualified bankruptcy lawyer in St. Louis before proceeding. Whether or not these taxes can be discharged is a complex question and affected by numerous facts and circumstances. It is important that you do your own due diligence, gather all the information regarding your tax situation, including all tax returns and notices sent by the IRS so that you will have the information available when you seek the advice of a knowledgeable attorney before proceeding.

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