Owing money to the government for back taxes can be a stressful situation. People often ask whether they can discharge tax debts through bankruptcy. The answer is – maybe. Depending on the characteristics of your tax debt, bankruptcy is one of the ways you can solve, or at a minimum, manage your tax related debt problems.
An experienced bankruptcy lawyer can help you determine exactly whether or not your debts tax qualify for a discharge in bankruptcy, but understanding a few basic principles will help to determine how your tax debt will be handled in bankruptcy:
Type of bankruptcy & taxes
Chapter 13 is a court-approved repayment plan that allows you to pay your debt over time. All priority tax (typically new and recently assessed) debts must be paid in full over the life of the repayment plan. Chapter 7 does not require a repayment plan, but, similar to Chapter 13, all priority tax debts will not be eligible for a discharge. In limited cases, non-priority (typically old) tax debts can be discharged in both Chapter 7 and 13.
Usually, time will tell…
There are a few important questions that must be considered to determine what impact bankruptcy will have on tax debts. These include:
- When was the tax debt assessed?
- When were your returns filed?
- When were the returns due, including any extensions?
- What type of tax debt is it? Personal, business, etc.
As a general rule, in order for tax debts to be discharged through bankruptcy, the debts must be for a return that was timely filed, that was due at least three years before the bankruptcy filing, and the debt was assessed more than 240 days before the bankruptcy filing. In addition, tax debts related to returns that were untimely must have been filed two years before the bankruptcy filing in order to be eligible for a discharge.
Special situations – fraudulent returns, withholding taxes, etc.
Without exception, taxes from which an individual filed a fraudulent return or willfully attempted to evade such tax will not be eligible for a discharge in bankruptcy. This can mean submitting false documents or neglecting to report income to the IRS. If you filed fraudulent information on your tax return, it’s unlikely that filing bankruptcy will be able to help.
Property taxes are another concern that many people have. In order for a property tax to be discharged in bankruptcy, the debt must have been incurred more than one year before the bankruptcy filing. Keep in mind, however, that just because an individual may be eligible for a discharge for these debts, it does not mean that any related lien on the house, car, etc. for which these debts were assessed goes away.
Withholding taxes can also become a problem for both business owners and individuals. Whether you own a business that must withhold taxes for your employees or you are employed and withholding taxes are not deducted from your pay, you must ensure that the required withholding taxes are remitted to the government. If these tax debts are owed in either capacity, they will not be discharged in bankruptcy.