In many cases, you will continue to owe tax debts at the end of your bankruptcy case. However, it is not true that you cannot get rid of your tax debts. Tax debts may be discharged under Chapter 7 or Chapter 13 if (and only if) the debts meet certain requirements. Under Chapter 7, you may discharge your tax debts (among other debts) by liquidating your non-exempt assets and distributing the proceeds among creditors including the IRS. Under Chapter 13, you will establish a repayment plan of up to five years after which certain remaining tax debts can be discharged. Be sure to remember that in order to file for a Chapter 7 case, you must be eligible to file for Chapter 7 bankruptcy.
The determination of whether you can discharge your tax debts will depend on the age of the debt, the date of assessment of the tax by the Internal Revenue Service, the dates you filed for a tax return, and whether you willfully attempted to evade paying taxes or filed a fraudulent tax return. If you meet all the requirements, you may be able to get rid of your tax debts in bankruptcy proceedings. Below explains each requirement you must satisfy to discharge you tax debts in your bankruptcy case.
Five Rules to Discharge Tax Debts
To be dischargeable, individual income tax liabilities must meet all of the following five rules:
1. the taxes are income taxes,
2. the due date for filing a tax return is at least three (3) years ago,
3. the tax return was filed at least two (2) years ago,
4. the tax assessment is at least 240 days old,
5. the tax return was not fraudulent and the taxpayer is not guilty of tax evasion
First, the tax must be for federal or state income taxes.
Federal and state income taxes are treated similarly in a bankruptcy case. Income taxes are the only kind of tax debt that can be discharged. Other taxes such as payroll taxes, penalties for fraud, most state sales taxes and certain excise taxes can never be eliminated.
Second, to eliminate a tax debt, your income taxes must have been due (with all extensions) at least three (3) years before your bankruptcy case is filed.
For instance, if your income taxes were due on April 15 of 2017 (typical due date of federal or state income tax), the earliest date you can file for bankruptcy and discharge you tax debts is April 15, 2020. The due date includes any extension, so if you receive an extension of the time to file your tax return, the three-year period runs from the date that the taxes are due under the extension. [11 U.S.C. §507(a)(8)(A)(i)]
Third, you must have filed a tax return at least two (2) years before filing for bankruptcy.
The time is measured from the date you actually filed the return. In most cases, if the IRS filed a substitute return on your behalf because your extensions have expired, you are deemed not to have filed a return and cannot discharge the tax. Also, a tax return filed even a day late without an extension may not be dischargeable. So it is advisable for you to file all of your tax returns within the due date, and get an extension if you know you will be filing late. [11 USC §523(a)(1)(B)]
Fourth, the IRS must have assessed the tax at least 240 days before you file for bankruptcy.
Typically, the date of assessment is on or near the date you file your income tax return. However, you should not assume that the assessment date is the same as the filing date and should always check the actual date. You can obtain information on the assessment date from the IRS. Keep in mind that the 240-day period can be expanded for a number of reasons including: making an offer-in-compromise (which is an agreement between a taxpayer and the IRS that settles the taxpayer’s liabilities for less than the full amount owed), having filed another bankruptcy case, or obtaining a taxpayer assistance order. The time period will be suspended while any of these events are pending. Although the IRS generally has three years to assess taxes, this will not be an issue in bankruptcies because you will not be able to discharge those taxes under the three (3) year rule mentioned above. [11 U.S.C. §507(a)(8)(A)(ii)].
Finally, the tax return must not be fraudulent or frivolous or otherwise the taxes are not dischargeable.
Also, if you willfully attempted to evade paying taxes, you cannot discharge your tax debts. [11 U.S.C. §523(a)(1)(C)].
Certain Tax Debts That Are Not Eligible for Discharge
Even if your tax debts are dischargeable (passes all the requirements: the three-year rule, two-year rule, the 240-period rule, and are not fraudulent), any “tax liens” will remain on your property if the IRS previously recorded the tax lien on the property before you file for bankruptcy. This means that the IRS can claim an interest in your property (in other words can seize and sell your property) even after you discharged your personal obligation to pay the tax. You will have to clear the clear the title by paying off the tax lien before you sell such property. This rule applies only to tax liens recorded against your property before you file for bankruptcy.
Although tax liens are not dischargeable after the bankruptcy, there are other options you may consider in dealing with tax liens. In a Chapter 7 case, the IRS may voluntarily release liens after a bankruptcy discharge if the taxes are dischargeable and you have substantial nonexempt property to which the lien can attach. However, you may need to request the release of the lien. In other cases, you may make the IRS an offer-in-compromise which will result in the settlement of the tax lien for less than the amount owed.
Bankruptcy can be an effective tool in dealing with your tax debt. But it is not easy to determine which taxes can be discharged at any point. To discharge your tax debt, your income must have been due at least three years before you file for bankruptcy, you must have filed a tax return for the tax debt at least two years before filing for bankruptcy, and the tax must have been assessed by the IRS at least 240 days before you file for bankruptcy. In other words, timing is more than essential: it is everything. On top of that, you must not have committed fraud or willful evasion. So, if you want to discharge your tax debt by filing for bankruptcy, be sure to obtain an advice and support of a bankruptcy attorney and prevent any costly and irreversible mistakes.
Getting Help with Your Georgia Tax Bankruptcy Case
If you are faxing tax issues that a bankruptcy may be the answer for, call us at 770-609-1247 to discuss your case. We have helped hundreds of bankruptcy clients and can evaluate your case to see what course of action is best for you. Contact >>