Can you file bankruptcy on taxes owed to the IRS?
Yes, and get those taxes discharged under certain circumstances.
For a free consultation on how to quickly resolve your tax debt problem and get your financial situation under control, call David M. Offen, your bankruptcy lawyer in Philadelphia, at 215-625-9600 to schedule a free, no-obligation consultation. Our office is located in Center City Philadelphia and is very easy to reach from Philadelphia and the suburbs.
What the IRS Doesn’t Want You To Know
Everyone’s heard the two certainties of life according to Ben Franklin. And while we can’t offer advice to outsmart the grim reaper, old Ben should have spoken to a bankruptcy attorney. As long as you haven’t been caught for evasion or fraud, we might be able to clear your unpaid taxes. Keep reading to learn how filing bankruptcy could help you wipe out old tax debt–and what mistakes could leave you stuck with a tax bill.
Recently, our bankruptcy attorneys helped a client owing the IRS over $55,000 in delinquent taxes. We reduced his payment from over $1200 per month to $750 per month for 36 months over a three year Chapter 13 plan. At the end of the plan, the remaining balance owed to the IRS was wiped out.
A couple came to our office not long ago with over $125,000 in taxes owed to IRS, the Commonwealth of Pennsylvania and the City of Philadelphia. We saved them over $100,000 by getting a Chapter 13 plan approved for them that allowed them to pay only about $25,000 over a five year plan. The remaining $100,000 was discharged!
Taxes Are (Not) Forever
There is a common misconception that Federal income tax debts cannot be discharged in bankruptcy. It is true that income tax is a priority debt, and that the government makes it difficult to discharge this kind of debt. But a bankruptcy attorney can discharge a variety of unpaid taxes in a strategic bankruptcy.
Cheat on Taxes – Get Stuck With A Bill
The IRS has developed a reputation as one of the most relentless federal agencies. Legendary gangster Al Capone evaded police and paid off prohibition agents–but in the end, it was the Internal Revenue Service that brought him down.
Every year, high-profile celebrities and sports players get nabbed trying to dodge the tax collector. Not only is tax evasion a crime—-it also makes you ineligible to discharge your tax debts. Don’t let the Internal Revenue Service sabotage your finances.
When Can You File Bankruptcy on IRS Debt?
You need to meet the following conditions to be allowed to discharge your tax debt. These rules are followed strictly, and even a two or three day grace period will not be permitted.
The 3 Year Rule:
The taxes you want to discharge must have been due at least three years before the date you filed bankruptcy. For federal income tax, this is on or around April 15th. State and local taxes will differ.
Here’s an example: If you don’t pay your taxes due on April 15th, 2019, you could not file to discharge that debt until April 15th, 2022 at the earliest. If your file for a tax extension, three years runs from the date of the extension, not the date that the tax was due.
The Two Year Rule:
You must wait two years from the date you filed your taxes to file for a bankruptcy discharge. This grace period allows you to still get a discharge of your taxes three years from when they came due when filing late.
The date your taxes are legally counted as filed depends on when and how you send the information to the IRS.
If you send tax returns certified mail via the United States Postal Service, and the postmark is on or before April 15th, the taxes will be treated as if they were received on time, even if they arrive at the IRS office after that date.
However, if taxes are mailed after April 15th, or are mailed by a private carrier and arrive after April 15th, the date of filing is the actual date the IRS receives your documents, not the date they were posted.
This might seem like a trivial detail, but since these deadlines are absolute, just one day’s delay could be the difference between a tax being dischargeable or not.
The 240 Day Rule:
If your tax debt passes the previous two tests, there is one more condition: The actual date of assessment must be at least 240 days prior to filing bankruptcy. If your tax debt is a case of simply not paying, then the date of assessment should be close to your filing date.
But in tax disputes, the IRS can assess additional taxes for several years after the original assessment was made. If you are involved in any tax action, you should notify your bankruptcy lawyer immediately, as this could seriously impact your ability to have these taxes discharged.
When Taxes Can’t Be Discharged in Bankruptcy
Not all taxes can be discharged in a bankruptcy case.
- Recently missed taxes. You have to wait three years (at least) before you can file to have bankruptcy taxes discharged.
- Fraudulently filed taxes.
- Taxes assessed when no return was filed.
- Substitute returns filed on your behalf by the IRS do not count towards the filing requirement.
It Is Possible to Eliminate Tax Debt in Chapter 7 Bankruptcy
Many people believe it is impossible to eliminate tax debt in Chapter 7 bankruptcy. It may not be easy, it may not be something everybody can do, but it is a possibility.
If you meet particular qualifications, you can discharge some or all of your tax debt by filing Chapter 7 bankruptcy.
Become Familiar with the Requirements for getting Taxes Discharged in Chapter 7 Bankruptcy
Before you file for Chapter 7 in an attempt to eliminate tax debt, you should first become familiar with the discharge requirements. These are as follows:
- The taxes are income based. This is the only type of tax that can be discharged through Chapter 7.
- The tax return was due a minimum of three years ago.
- You filed the tax return a minimum of two years ago.
- The taxes were assessed a minimum of 240 days ago.
- You did not partake in any type of willful evasion or fraud.
Can Bankruptcy Help With Tax Liens?
Unfortunately, bankruptcy cannot clear tax liens already placed against your assets. What it can do is prevent new liens from being filed or collection actions from being taken. It can also prevent the IRS from seizing property through the levy process to settle your tax debts.
Liens survive bankruptcy intact. That means that you do not personally owe the government the value of discharged taxes as a debt, but the government’s claim to your assets still exists. When this happens, the lien will not attach to assets you acquire after the bankruptcy concludes.
If the underlying personal liability cannot be discharged, then not only will the lien survive, but it will also attach itself to assets you acquire after bankruptcy and must eventually be paid to avoid future levies.
Do You Need Help Filing Bankruptcy on Back Taxes?
Do you have questions? Are you wondering if Chapter 7 bankruptcy or Chapter 13 bankruptcy is the answer? You can contact us to learn more about the entire process, including how your tax debt will be handled. If you need an expert to guide you through the bankruptcy process, schedule a consultation with Philadelphia bankruptcy attorney David M. Offen.
David M. Offen has over 20 years of experience and has helped over 12,000 individuals and families go through the Bankruptcy process. To schedule a free consultation, call (215) 625-9600. You will get your questions answered about how bankruptcy can help you with taxes owed to the Internal Revenue Service as well as to State and Local Governments.
