Are Back Taxes Dischargeable in Bankruptcy?

Yes, back taxes are dischargeable in Chapter 7 or Chapter 13 bankruptcy, if those back taxes meet certain qualifications, including the 2/3/240 rule.

Additionally, only income taxes are dischargeable in bankruptcy. The Bankruptcy Code doesn’t define “income taxes.” But the phrase definitely excludes property taxes and trust tax payments. Moreover, any verified evidence of tax fraud, willful or not, usually renders income taxes nondischargeable, whether the debt passes the 2/3/240 rule or not.

Since the income tax discharge rules are so complex, only a good Chicago bankruptcy lawyer can determine whether debtors must pay back taxes. These taxes could be paid as part of an IRS repayment agreement or a Chapter 13 plan.

Two Years

Income taxes are dischargeable in bankruptcy if the debtor’s tax returns at issue have been on file for at least two years.

We examined one of these key terms above, but we haven’t examined the others. “Discharge” means the judge eliminates the legal obligation to repay a debt. However, the debt itself remains.

So, if the IRS filed a tax lien before the debtor filed bankruptcy, that lien remains in place. A Chicago bankruptcy lawyer must address it in a separate proceeding. Or, if the Automatic Stay expires before the collection statute of limitations (usually seven years) expires, the IRS may be able to try and collect that debt. Once again, a Chicago bankruptcy lawyer must deal with the matter in a separate proceeding.

Incidentally, taxpayer-filed returns must have been on file for at least two years. If the IRS prepared substitute returns to initiate collections proceedings or for any other purpose, those documents don’t count.

Three Years

The income tax must be at least three years past due. A Chicago bankruptcy lawyer cannot simply look at the calendar and determine if a debtor meets the three-year rule.

Tax Day is not always April 15. If D-day falls on a Sunday or Federal holiday, the deadline automatically moves up one day.

Furthermore, many debtors make partial payments and/or file for extensions. Assume Frank has a nine-to-five day job and he’s an Uber driver on some nights and weekends. His withheld taxes probably cover his day job income, but they probably don’t cover his Uber income.

Finally, some people or groups receive special extensions. Apollo 13 astronaut Jack Swigert got a filing extension because he was out of the country (orbiting the moon) on Tax Day 1970.

Two Hundred-Forty Days

If the debt has been assessed within the last eight months, a bankruptcy judge cannot discharge that debt. “Assessment” is an accounting term that basically means calculating the debt. Before the IRS sends any letter that includes the total amount due, accountants normally assess the debt.

If the debt doesn’t qualify for Chapter 7 discharge, several options are available. Sometimes, a Chicago bankruptcy lawyer files a motion for mediation, which usually forces the IRS to reduce the amount due. A Chapter 13 repayment plan bankruptcy might be a good idea as well. IRS payment plans are available in many cases, and IRS tax forgiveness is available in a few cases.

Count on a Thorough Cook County Lawyer

No matter what kind of financial problem you are having, there’s a way out. For a free consultation with an experienced bankruptcy lawyer in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.

Source:

irs.gov/businesses/small-businesses-self-employed/declaring-bankruptcy