Filing for bankruptcy in Georgia can help alleviate many types of debt, including tax debts that meet certain requirements. Not all taxes are dischargeable in a bankruptcy and tax liens cannot usually be removed from real property you already own; but future tax liens can be avoided in successful cases.. Some types of tax debt are never dischargeable through bankruptcy, but it may be possible to eliminate or manage federal and state (including Georgia income taxes) income tax debt. If an individual qualifies, chapter 7 bankruptcy is the best and simplest way to eliminate income tax debt.
Chapter 7 Bankruptcy Requirements – Federal and Georgia State Taxes
Chapter 7 bankruptcy may allow for the discharge of income tax debt if certain criteria are met. Typically, if an individual can pass a “means test” demonstrating his income is low enough then he or she may file for chapter 7 bankruptcy.
In order to discharge income tax debt in chapter 7 bankruptcy several requirements must be met:
The tax must be income tax – some federal and state (including Georgia) taxes are available for discharge
The debt must not be a result of tax evasion or fraudulent returns – any attempt to defraud the I.R.S. will result in the debt being non-dischargeable
- A tax return was filed for the debt at least two (2) years prior – whether this may be extended to include late-filed returns is dependent on the court but will not include any I.R.S.-prepared “substitute for returns”
- The debt must be at least three (3) years old – the debt must have been due at least three years before the day the bankruptcy is filed
- The income tax debt must have either been assessed by the I.R.S. (or State of Georgia) at least two hundred forty (240) days before the filing or has not been assessed at all – may include audit adjustments and amended returns
It is important to note that state income taxes (Georgia included) usually must abide by the same rules as the federal government (IRS) for the dischargability of taxes. So if you owe a combination of federal and state taxes, or just state taxes, the same bankruptcy rules apply to both. Also, if you live in Georgia but owe taxes for another state, the out-of-state taxes should be dischargeable so long as they also meet the federal income tax requirements for dischargability.
What is Tolling?
The I.R.S. imposes three different time periods that must be met: (1) 3 years; (2) 2 years; and (3) 240 days. Tolling is the extension of a stated time period.
An individual may have inadvertently extended a time period if he filed for a tax extension, has claimed prior bankruptcy, been involved in a collection due process hearing, or received an innocent spouse relief or tax assistance order. The I.R.S. may extend a time period if it has suspended collections or has prepared a “substitute for returns” on behalf of an individual. In order to discover if the time periods were met it will be necessary to order an account transcript from the I.R.S. for each year in question. The transcript will contain all necessary information to determine whether a given time period has been met.
This same rule applies to state taxes, such as Georgia income taxes, and taxes for other states.
What is not eligible for discharge of Federal and Georgia income taxes?
If all of these requirements are met, the obligation to pay the income tax debt back to the I.R.S. (and Georgia) may be discharged and no garnishment of wages may be imposed. However, if the I.R.S. or Georgia placed a tax lien on any property as a result of the debt, the tax lien will remain on the property and must be paid off. The same general rules generally apply to other states, in addition to Georgia income taxes owed and existing liens you may have.
Several types of tax debt are not eligible for discharge. Tax penalties may or may not be eligible depending on why the penalty was incurred. For example, penalties for fraudulent returns are not eligible. Tax debts that accrued as a result of unfiled returns are not dischargeable. Additionally, payroll taxes such as trust fund taxes or withholding taxes that are withheld by an employer are not dischargeable.
Are there any alternatives?
The I.R.S. may allow an individual to enter into an installment agreement. It may even be possible to make the I.R.S. an offer less than the amount owed in order to settle the remainder of the debt. If an individual cannot qualify for chapter 7 bankruptcy but does qualify for chapter 13 bankruptcy, it may be possible to implement a repayment plan. In some cases the statute of limitations may have run on the debt, making it unavailable for collection. The statute of limitations is ten years for federal income tax. 26 U.S.C. § 6502. As with filing for bankruptcy, certain actions and extensions may toll the statute of limitations so it is not advisable to assume the statute has run without first consulting an attorney and obtaining an account transcript.
Also, the state of Georgia allows for people to enter into payment plans. While Georgia is less likely to accept anything other than the full amount owed, usually the amount of income taxes owed to a state are significantly less than the federal taxes owed. The procedures for entering into an income tax repayment plan are on the Georgia Department of Revenue website.
Income tax debt may be eligible for discharge if all eligibility requirements are met. If you plan to file chapter 7 bankruptcy in hopes of eliminating income tax debt, it is advisable to immediately file all delinquent returns in order to begin the countdown of the required time periods. Your attorney will advise you on whether late returns will be eligible for discharge in your jurisdiction. Retain copies of all original tax documents, organized by year so everything is readily accessible for review with your attorney. Your attorney will guide you through this complicated process and the more organized you are, the easier it is for your attorney to maximize any benefits that may be available to you.
If you have questions about bankruptcy and the possibility that your taxes may be included in a bankruptcy discharge, call us at 770-609-1247 to discuss with one our experienced bankruptcy attorneys. Contact >