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Archive for the ‘discharge taxes’ tag

Bankruptcy Writes Off (Some) Income Taxes

March 4th, 2019 at 8:00 am

Bankruptcy permanently writes off income taxes, as long as the tax meets certain conditions. For some taxes the conditions are easy to meet. 

 

Bankruptcy DOES Write Off Income Taxes

There are certain very special debts that bankruptcy never writes off. Child and spousal support is a good example. See Sections 523(a)(5) and 101(14A) of the U.S. Bankruptcy Code.

Income taxes are different. Income taxes CAN be written off, as long as you meet a few conditions. These conditions mostly tie in to timing—when the tax was due and when (and whether) you filed its tax return.

The Two Timing Conditions

In most people meeting these conditions is straightforward. You essentially have to file your tax returns and wait long enough to comply with for the following two conditions:

  1. You submitted the pertinent tax return to the IRS/state and did so more than 2 years before filing your bankruptcy case. Section 523(a)(1)(B)(ii) of the Bankruptcy Code.
  2. The legal due date for that tax return was more than 3 years before filing your bankruptcy case. Section 507(a)(8) of the Bankruptcy Code.

For example, assume you owe the IRS $5,000 for the 2014 tax year, and you submitted its tax return a full year late—in April 2016. It’s been more than 2 years since that so you meet the first condition. The legal due date for that tax return was in April 2015, which is more than 3 years ago. So you also meet the second condition. So in most situations bankruptcy would write off that 2014 income tax debt of $5,000.

A Few Important Twists about the Timing

Keep three practical considerations in mind about these two time periods:

  1. The 3-year period only starts to run when the tax return was “last due, including extensions.” Section 523(a)(1)(B)(ii). The 3 years only begins at the extended due date. It’s absolutely crucial that your bankruptcy lawyer gets the correct information from you about whether you got an extension that year.
  2. If you’re cutting it close (because you’re in a big hurry to file), the precise tax return due date can be crucial. Remember that taxes are not always due on April 15 and October 15 (for extensions). Weekends and holidays can push the due date out even several days. That means you may have to wait some extra days to file your bankruptcy case to be able to write off that tax debt.
  3. Careful about making a mistake about whether and when you actually submitted your tax return. It may be worth finding out directly from the IRS/state to avoid getting a rude surprise after filing your bankruptcy case.

Other Uncommon Conditions

There are two other conditions that might possibly apply, in more complicated situations.

  1. More than 240 days must pass from when the IRS/state assessed the income tax to when filing your bankruptcy case. Assessment usually happens within a few weeks after you get your tax returns in to the IRS/state. So usually this condition is easily met. It only tends to apply if assessment gets delayed with a tax audit, litigation in Tax Court, a tax appeal, offer in compromise, and other complications.
  2. Regardless of all these timing rules, you can never write off an income tax based on a fraudulent tax return or if you intentionally evade a tax. This is uncommon. It tends to only come up if you were significantly dishonest with the tax authorities.

Conclusion

In most situations you can write off the tax if you filed your pertinent tax return and both the 2-year and 3-year periods have passed. But the intersection between bankruptcy and income taxes is definitely complicated. Be sure to see a competent bankruptcy lawyer if you owe taxes so that you get the full benefit of the law.

 

Filing Chapter 13 in 2019 to Write Off More Income Taxes

January 14th, 2019 at 8:00 am

Chapter 13 is a riskier, longer, and maybe more expensive way to escape a dischargeable income tax debt—but may still be your best option. 


Last week we showed how to permanently write off (“discharge”) more of your tax debts through Chapter 7 “straight bankruptcy.” Today we show how to do this with Chapter 13 “adjustment of debts.”

Why Use Chapter 13 If Chapter 7 is Faster and Cleaner?

Chapter 7 is a very fast way to discharge an income tax debt that qualifies for discharge. You would very likely no longer owe the tax only about 4 months after filing a Chapter 7 case.

But Chapter 13 case could be much better for you than Chapter 7 for other reasons. Those other reasons may outweigh the benefit of discharging your dischargeable tax debt quickly.

You may owe some other income tax debt(s) which do not meet the conditions for discharge. These other taxes that may be too large to pay off reasonably through a monthly payment plan with the IRS/state.  The other taxes may not qualify for an Offer in Compromise or other settlement. You may well save money and avoid significant risks by handling all of your taxes in a Chapter 13 case.

There are also many other reasons that Chapter 13 would be worthwhile for you, reasons not involving income taxes. It may save your home from foreclosure or your vehicle(s) from repossession. Chapter 13 can deal with a child or spousal support arrearage much better than Chapter 7. There are many other situations where Chapter 13 gives you extraordinary and unique powers. So it can be worthwhile overall in spite of its disadvantages in dealing with a dischargeable tax debt.

How Does Chapter 13 Deal with Dischargeable Income Taxes?

Determining whether a particular income tax debt can be discharged in Chapter 13 is the same as in Chapter 7. Please see our last blog post for the conditions of discharge. These conditions mostly involve how long it’s been since the tax return for the tax at issue was due and when the return was actually submitted to the IRS/state. Sometimes there are other pertinent conditions, but usually it’s just a matter of timing.

Because of how the timing works, there are certain points of time in 2019 when a tax that hadn’t earlier qualified for discharge would then qualify. Again, see our last blog post about those crucial times happening this year.

If your tax does meet the conditions for discharge, it can get discharged in your Chapter 13 case. But this works quite differently than under Chapter 7.

One key difference is that under Chapter 13 there’s a good chance that you would pay something on your dischargeable tax debt.

Under Chapter 13 dischargeable income tax debts is treated like the rest of your “general unsecured” debts. Under your payment plan all such debts get paid the same percentage of their total amounts. That percentage may be any amount from 0% to 100% of their amount, depending on your budget and other factors.

Consider two situations: First, if you have a “0% plan” then you’d pay nothing on the dischargeable tax just like in a straightforward Chapter 7 case. Second, even if you do pay some percentage, often that actually doesn’t increase the amount you pay into your payment. We’ll explain these two situations.

A 0% Payment Plan

In some Chapter 13 cases all the money that the debtor can afford to pay goes to special creditors. All the money going into the Chapter 13 payment plan goes either to secured or to “priority” debts. These would include home mortgages, vehicle loans, nondischargeable taxes, child and spousal support, and such. These usually have to be paid in full before the “general unsecured” debts receive anything.  So during the 3-to-5-year payment plan no money goes to the dischargeable income taxes. That’s a 0% Chapter 13 plan.

Assuming the bankruptcy approves the plan, and you successfully complete it, at its conclusion the dischargeable taxes get discharged, without you having to pay any of it.

Payment Plans Which Do Not Increase the Amount You Pay

In many Chapter 13 plans the amount available for the pool of the “general unsecured” debts is a fixed amount. That amount is based on what you can afford to pay over the required length of the plan. (That required length is usually 3 or 5 years.) That fixed amount does not change regardless how much in “general unsecured” debts you owe. The amount just gets distributed to all those debts pro rata. The more you owe in “general unsecured” debts the lower the percent of the debts that fixed amount can pay.

For example, assume you can afford to pay the pool of “general unsecured” debts a total of $2,000 during the course of the payment plan. All the rest of the money you pay into the plan is earmarked for secured and “priority” debts. Assume also that you have $20,000 in unsecured credit card and medical debts and $5,000 of dischargeable income tax. Without the income tax, the $2,000 would be paid towards the $20,000 in “general unsecured” debts, resulting in a 10% plan. ($2,000 is 10% of $20,000.) Now when you add in the $5,000 tax, there’s a total of $25,000 of “general unsecured” debt. $2,000 is 8% of $25,000, resulting in an 8% plan.

You would be paying no more—the fixed amount of $2,000—over the length of your plan. The fact that you owe the $5,000 in dischargeable tax would not increase the amount you would pay. Then at the successful completion of the case all remaining “general unsecured” debts, including whatever was remaining on the dischargeable tax, would be forever discharged.

Conclusion

So you see that Chapter 13 is a slower and somewhat riskier way to discharge an income tax debt. Plus you may have to pay a portion of the tax instead of quickly discharging all of it under Chapter 7. But then again you may not have to pay anything on it, as described above. In any event, the delay and risks may well be worthwhile. Your bankruptcy lawyer will help you weigh all the advantages and disadvantages so that you can make the right choice.

 

The Surprising Benefits: Break a Tax Payment Plan through Chapter 7

June 4th, 2018 at 7:00 am

Can’t afford your current IRS/state monthly payment plan? Have an upcoming additional new year of taxes to pay? Chapter 7 can often help.

Tax Installment Agreement You Can’t Afford

It’s a common problem. You owed income taxes a year or two ago when you sent in your tax returns. Money was very tight so you couldn’t just pay it off. You found out that the IRS let you pay that unpaid tax through a monthly installment plan. If you also owed state income taxes, you likely found out that your state taxing authority lets you do this, too.

So you set up the payment plan with the IRS and/or state. But your financial situation only got tighter because now you had a new monthly obligation you absolutely had to pay.  So now you are struggling to pay the monthly tax payment along with your living expenses and other debts. You wish there was a way to get out of your IRS/state monthly tax payment and other debts.

Tax Installment Agreement You Are About to Break

If you were desperate to have the money to pay the monthly tax payment (along with your other obligations), you may have arranged to withhold less from your paycheck during the current year. Or if you’re self-employed you may not have paid enough estimated quarterly taxes.

If so, you’ll likely owe income taxes again when your next tax returns are due. Assuming you couldn’t then immediately pay this new tax owed, this would likely be considered a breach of your current payment plan with the IRS/state.

At that point the IRS/state could terminate the monthly payment agreement. It could then take aggressive collection action against you, something you really want to avoid.

Or instead the IRS/state might let you roll the new tax owed into your current installment agreement. But that would likely result in an increased monthly payment. This only aggravates your problem of having more debt than you can handle.

Even if you could afford to pay an increased monthly tax installment payment, you’d be going backwards instead of making progress. The tax interest and penalties would add significantly to the amount you have to pay. You’re in vicious cycle and don’t see a way out of it.

Two Ways Out

But there ARE potentially two ways out: Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts.” We’ll cover Chapter 7 today; Chapter 13 next week.

Chapter 7 Discharge of Tax Debts

Which Chapter is better depends on many factors, but especially on whether your older income tax debts are “dischargeable.” This means whether the taxes can be legally, permanently written off in bankruptcy.

Some income taxes CAN be discharged. Basically, certain amounts of time must pass since the time the tax return for the tax was legally required to be submitted, and since the tax return was actually submitted. If you meet those conditions (and some other possibly relevant ones), the tax debt is dischargeable just like any ordinary debt.

When Chapter 7 Makes Sense

If ALL the income tax debt in your present monthly payment plan is dischargeable, Chapter 7 likely makes sense. You’d not have to pay anything anymore on that monthly payment plan. If you anticipate owing new taxes with your next tax return(s), you could likely enter into a fresh monthly payment plan for these taxes. You wouldn’t end up breaching your present payment plan because you would no longer owe anything on it.

If SOME of the income tax debt in your present monthly payment plan is dischargeable, Chapter 7 may also make sense. You would no longer have to pay that part of your taxes, which would presumably reduce your monthly tax payments. If that reduced amount is one that you could afford—especially after discharging all or most of your other debts—Chapter 7 would help enough to justify using this tool.

If Chapter 7 Isn’t Good Enough

If you can’t discharge all your income taxes, or enough, through Chapter 7, consider Chapter 13 “adjustment of debts.” We’ll explain in our blog post next week.

 

What the IRS/State Can and Can’t Do After You File Bankruptcy

February 16th, 2018 at 8:00 am

Filing bankruptcy stops tax collection just like it stops other debt collection by more conventional creditors. But there are exceptions.  

 

The last several weeks of blog posts have been about bankruptcy’s “automatic stay” protection from creditor collections.  We’ve also gotten into many of the exceptions to that protection—when certain creditors CAN take certain actions.

Today we focus on some very limited exceptions to the automatic stay protection, those which apply specifically to income taxes. In bankruptcy you don’t want surprises, especially from a tax collector. These limited exceptions are reasonable. But it’ll still help you to understand them in order to not be surprised by them.

Tax Determination is Allowed, Tax Collection is Not

Simply put, the exceptions to the automatic stay protections are about determining the amount of tax owed. The IRS and the state tax authorities can take steps during bankruptcy to figure out how much you owe. They can make you do what the law requires along these lines. For example, they can require you to file your tax returns, regardless that you’ve filed bankruptcy. But then they can’t take any action beyond that to collect any taxes owed.

The IRS/State CAN’T. . .

The automatic stay immediately stops virtually all debt collection activity against you when you file bankruptcy. This protects you, your income, and your assets. Everything is put on hold so that the bankruptcy laws can be applied to your entire financial situation.

Debts that the law discharges—legally writes off—disappear. Other possible debts that the law does not discharge you continue to owe. With income taxes, if they’re old enough and meet other conditions, they’re discharged. Otherwise you’ll either owe them after completing the Chapter 7 case or you’ll pay them through the Chapter 13 case. But in the meantime the IRS and state are forbidden from collecting the debt. They are also forbidden to take any action directly related to collection, like recording a tax lien against your home or vehicle.

So to be clear, the automatic stay exceptions we’re discussing here do NOT allow the tax authorities to take any action to get your money or assets. The IRS and state tax authority can’t start or continue garnishing your paychecks or bank accounts. They can’t levy on (take away) anything else you own. They can’t call you to pay the tax, and can’t send you tax bills.

The IRS/State CAN. . .

As we said above, the taxing authorities can take certain specific steps to determine how much tax you owe. Some of these steps you wouldn’t expect your bankruptcy filing to affect—they’re probably not surprising. You filing bankruptcy does not prevent the IRS/state from doing the following:

  • Start or finish a tax audit “to determine tax liability.” (See Section 362(b)(9)(A) of the Bankruptcy Code.) But there can be no attempt to collect whatever that tax liability ends up being.
  • Send you a notice about the amount of tax that you owe—a “notice of tax deficiency.” (Section 362(b)(9)(B).) That notice is NOT a demand to pay the tax.
  • Demand that you file your tax returns. (Section 362(b)(9)(C).) In fact this step is often essential for the processing of your bankruptcy case.
  • Make an “assessment” of your taxes and issue a “notice and demand for payment.” (Section 362(b)(9)(D).) “Assessment” is a formal determination of the tax amount. The “demand” here is a term of art meaning that you are put on notice that you are obligated to pay the debt. But whether and when you really owe it usually depends on bankruptcy law.

Conclusion

The interplay between bankruptcy law and tax law can be quite complex. The rule of thumb is that bankruptcy stops tax collection but not tax determination. But your situation may have nuances that could make that rule of thumb misleading. If you are in the midst of, or fear, tax collections, be sure to see an experienced bankruptcy lawyer to find out what would happen in your unique situation. And it really does make sense to do so as early as possible. Tax debts are very much an area where early and wise planning could save you a lot of money.

 

Stop IRS Garnishment to Start Installment Payment Plan

January 29th, 2018 at 8:00 am

Filing Chapter 7 bankruptcy stops an IRS/state garnishment and other collection activities, even if it’s for a tax you still have to pay. 

 

We ended the last blog post saying that sometimes a Chapter 7 bankruptcy will stop a wage garnishment only temporarily. One such situation is if the IRS (or state tax agency) is chasing you on a debt you can’t discharge.

An Income Tax Debt You Can’t Discharge

You can’t discharge (legally write off) the tax debt usually because it’s not old enough. If you owe such a tax debt, and your paycheck (or bank account) is being garnished, filing a Chapter 7 case will only stop the garnishment for the length of time your case is active—usually about 3-4 months. The protection from collection called the “automatic stay” ends when you receive a discharge of your debts. (See Section 362(c)(2)(C) of the U.S. Bankruptcy Code.)

The 3-4 Month Break in Collections Can Be Enough

For practical reasons the temporary nature of the protection is often not a problem. You could get much longer and better protection against the IRS and state on a debt you can’t discharge than you would under Chapter 7.  You could do this by filing a Chapter 13 “adjustment of debts” instead. That would give you 3 to 5 years to pay a tax debt that you can’t discharge. Plus Chapter 13 gives you other benefits, such as usually income tax debts stop accruing further interest and penalties. But Chapter 13 also has disadvantages, including that it takes so much longer to complete.

So you would deal with a nondischargeable tax debt through Chapter 7 instead of Chapter 13 for a simple reason. You’ve decided that you could afford to pay that tax debt through monthly payments once you discharged all or most of your other debts. You’ve carefully reviewed your itemized budget with your bankruptcy lawyer. You know which, if any, other debts you will continue to owe. You know which debts will be discharged. From this you’d determine how much you could start paying the IRS/state every month. Your lawyer should be able to tell you whether that would be enough to keep your tax creditor happy.

Mission Accomplished

Assuming you could afford the required monthly payment, you file a Chapter 7 case instead of a Chapter 13 one. Then, within a few weeks after filing you or your lawyer contacts the IRS/state to make monthly payment arrangements. Those monthly installment payments could start either before the completion of your Chapter 7 case or immediately thereafter. As part of the arrangements the IRS/state would agree not to garnish your paychecks (or take most other collection actions) as long as you make the agreed payments until you paid the tax (plus interest and penalties) in full.

Conclusion

The fact that Chapter 7 stops collection of non-dischargeable taxes only temporarily is not a problem as long as you are confident that you qualify for and can afford to pay the monthly payments the IRS/state will require.

 

Timing: Writing Off Income Taxes

September 22nd, 2017 at 7:00 am

Usually you can discharge—write off—an income tax debt by just waiting long enough. Here’s how to discharge a tax debt under Chapter 7.  

 

Timing is Just About Everything

If you owe an income tax debt and file a Chapter 7 “straight bankruptcy” case, one of two things will happen to that debt:

  1. It will be discharged—permanently written off—just like any medical bill or other ordinary debt, or else
  2. Nothing will happen to that tax debt; you’ll continue to owe it as if you hadn’t filed bankruptcy.

The difference, most of the time, is timing—when you file your Chapter 7 case.

The Timing Rules

In most situations a Chapter 7 case will discharge an income tax debt if you meet two timing conditions. The date you and your bankruptcy lawyer file that case must be both:

  1. at least 3 years after the tax return for that tax was due, and
  2. at least 2 years after that tax return was actually submitted to the IRS or state tax authority.  

See Sections 507(a)(8)(A)(i) and 523(a)(1)(B) of the U.S. Bankruptcy Code.

One important twist: IF you got an extension to file the applicable tax return, then the above 3-year waiting period doesn’t begin until the end of the extension. Section 507(a)(8)(A)(i). For example, let’s say you got a 6-month extension from April 15 to October 15 of the pertinent year. So then the 3-year period starts on that October 15 instead of on the usual April 15 return filing due date.

These Rules Applied

Assume you owe $7,500 in income taxes for the 2013 tax year. You’d asked for a 6-month extension to October 15, 2014. But then you didn’t actually submit the tax return until December 31, 2014.  

If you’d file a Chapter 7 case at any point before October 15, 2017, you’d continue owing the $7,500 tax. If you’d file on or after October 15 you would likely not owe a dime.

That’s because on October 15, 2017:

  1. At least 3 years would have passed since the extended due date of October 15, 2014, and ALSO
  2. At least 2 years would have passed since actually submitting the tax return on December 31, 2014.

Or, take with same $7,500 tax debt for the 2013 tax year with similar facts but a couple differences. You didn’t ask for an extension, but also didn’t submit the tax return until December 31, 2015.

Under these facts you’d have to wait until after December 31, 2017 to file the Chapter 7 case.

That’s because:

  1. 3 years since the tax return was due—on April 15, 2014—would have passed on April  15, 2017, but
  2. 2 years from the day the return was actually submitted would not pass until December 31, 2017.

Other Conditions

Earlier we said that “in most situations” Chapter 7 discharges income taxes debt when you meet the two timing conditions. So what are the other situations when taxes would not be discharged, even after meeting the 2-year and 3-year conditions?

There are two sets of them.

The first set comes into play if you made an “offer in compromise” to the IRS or state to settle the debt, or if you had filed a prior bankruptcy case involving this same tax debt. Since these are unusual situations, and the rules are detailed, talk with your bankruptcy lawyer if they apply to you.

The second set applies in situations in which the taxpayer “made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.” Section 523(a)(1)(C).  Different bankruptcy judges interpret this language differently. For example, is it a willful attempt to evade a tax to merely not submit its tax return when due, even if you submitted it voluntarily a year later? How about if you didn’t submit the tax return until the IRS personally contacted you to do so? Again, talk with your bankruptcy lawyer about how this part of the Bankruptcy Code is interpreted by your court. 

 

A Sample Completed Chapter 7 Case

September 15th, 2017 at 7:00 am

What does the completion of a successful Chapter 7 “straight bankruptcy” case look like? What happens to your debts?

 

A Sample Chapter 7 Case

In our last blog post we wrote about completing a Chapter 13 “adjustment of debts” case. Today we’re doing the same thing with a Chapter 7 case.

And like last time we’ll show what a finished Chapter 7 case looks like through tangible facts.

So imagine Jennifer filing a Chapter 7 case through the help of her bankruptcy lawyer to stop a lawsuit by a collection company, write off some old income taxes she’d been struggling to make monthly payments on, hang onto a vehicle whose loan she’d started falling behind on, and write off a bunch of medical, credit card and other personal debts.

The Facts

Jennifer had fallen behind on virtually all of her debts 18 months ago. She’d lost her job and it took her 3 months to find a new one.

She couldn’t pay a $1,200 medical bill, so a few months later it was sent to collections. For 12 months Jennifer disregarded collection letter and phone calls because she had absolutely no money to pay this debt. Then the collector sued her. She was justifiably very concerned about getting her paycheck garnished. She’s a bookkeeper. Her employer made clear that employees in her position better not have their wages garnished. Stopping that lawsuit from turning into a judgment pushed her into filing a Chapter 7 case.

In 2012 she’d started a side business to try to get ahead in life. It made some money for a while but then the income fell off and she had to close it down. She couldn’t afford to pay federal income taxes on that income, so she owed $8,000. In 2015 she’d arranged with the IRS to make $150 monthly payments, and struggled to pay those. She was really afraid what would happen if she stopped paying. She still owed $5,000 in income taxes, interest and penalties.

In the midst of all these financial pressures she struggled to pay her $390 vehicle loan payments. She was often late on the payments, racking up late charges. The last month or two before filing bankruptcy she’d gotten right to the brink of getting her car repossessed. She had absolutely no way to get to work or doctor appointments without her car. So being able to pay for her car was another big reason for filing bankruptcy.

The Filing of Her Case

When Jennifer’s case was filed that immediately stopped the collection lawsuit. She could also stop paying the $150 monthly installments on her income tax debt. That’s because the tax was old enough and otherwise qualified for discharge—legal write-off. She no longer had to pay on any of the $75,000 in other unsecured debts—other medical bills, credit cards, and various other obligations. So she was able to quickly catch up on her car loan and be able to pay it without distress.

The End of the Chapter 7 Case

Jennifer filed her case 100 days ago. That’s about how long most consumer Chapter 7 cases take to finish. Completing her case successfully is crucial because otherwise she’d lose the benefits of her case.

Regarding her vehicle loan, a few weeks earlier she had entered into a reaffirmation agreement with her lender. That agreement formally excluded the loan from the discharge of the rest of her debts. She agreed to remain liable on that loan in return for being able to keep her car. She was happy to continue owing on this debt, now that she had no trouble making the payments. Reaffirming the debt also allowed her to quickly start re-establishing her credit.

So now Jennifer receives a copy of a Discharge Order from the bankruptcy court. Her creditors all also receive copies. This court order prevents any of her creditors—other than the vehicle lender—from pursuing her or her assets. From the time her Chapter 7 case was filed until now the debts were on hold. The “automatic stay” prevented any of her creditors from taking any collection action against her. But Jennifer still owed the debts. Now the Discharge Order makes her debts permanently uncollectible.

All of her creditors—again with the exception of the vehicle lender lender—now each write off her debt from their books. This includes the IRS. It becomes illegal for any of these creditors to do anything to collect its debt. They must report to credit reporting agencies that the debt has been written off and is no longer owed.

Conclusion

So Jennifer can get on with her life in financial peace. She doesn’t worry about lawsuits and garnishments. She doesn’t fear what the IRS will do to her if she misses an installment payment. And she can comfortably pay her vehicle loan payment and looks forward to paying it off. Other than that manageable single payment she is debt-free, and appreciating her fresh financial start.

 

Income Taxes Discharged and Not Discharged in Bankruptcy

April 15th, 2016 at 7:00 am

Bankruptcy DOES discharge–permanently write off–certain income taxes. It’s mostly just a matter of time.  

 

 

Taxes Can Be Discharged (Legally Written Off)

Some special kinds of debts can never be discharged through bankruptcy. Examples are child and spousal support, and criminal fines and restitution. A bankruptcy filing does not write off these kinds of debts.

Income taxes are not like these. Almost all income taxes can be discharged, once a few conditions have been met.

Once the tax you owe meets those conditions, it is discharged exactly like any other debt. The IRS and your state taxing authority are no different than your credit card creditor. Once a tax debt is discharged, they can never chase you for that debt again.

The Two Main Conditions to Discharge Income Taxes

For most people the conditions are not complicated. They require filing your tax returns and waiting out a certain amount of time.

To discharge an income tax in bankruptcy, BOTH:

  • More than 2 years must have passed between the date that you submitted the pertinent tax return to the IRS or state tax agency and the date you file your bankruptcy case.
  • More than 3 years must have passed between the legal due date for that tax return and the date you file your bankruptcy case.

That’s usually all it takes: filing the tax return and waiting for these two-year and three-year deadlines to pass before filing bankruptcy.

A Few Cautions

Keep three practical considerations in mind about these two time periods:

  • The 3-year period starts to run when the tax return was “last due, including extensions.” So if you asked for (and got) an extension of time to send in the tax return—from April 15 to October 15, usually—the three-year period does not begin until the extended due date for filing the tax.
  • You need to be precise about the actual date the tax return was due for the tax year in question. For example, this year April 15 falls on a Friday but that’s also a holiday in Washington D.C., so tax returns are not actually due until Monday, April 18. A couple days may seem minor but can make all the difference between a tax debt being completely discharged and being still fully owed.
  • With the 2-years-since-tax-returns-filed condition, be sure to determine accurately whether and when the IRS/state actually received your tax returns. Unless you already have documented proof of that date, get that directly from the IRS/state to make sure.

Two Other Conditions that Seldom Apply

Most of the time, your tax debt is discharged if those two conditions are met. But there are two conditions that could possibly come into play for some people.

  • More than 240 days must have passed between the date that the tax was assessed by the IRS/state and the date you file your bankruptcy case. This is seldom an issue because assessment usually happens within a few weeks after you get your tax returns in to the IRS/state. So you automatically meet this 240-day condition when you meet the 2-year and 3-year ones. It only comes into play when assessment gets delayed with a tax audit, litigation in Tax Court, a tax appeal, offer in compromise, and similar complications.
  • If you file a fraudulent tax return or intentionally evade a tax, it cannot be discharged in bankruptcy. This is relatively rare. It arises only if you were materially dishonest on your tax return, by not including some of your income, or by intentionally claiming deductions or credits which you knew you were not entitled to, or by cheating the IRS/state in some other way.

Conclusion

Assuming that these last two conditions don’t apply to you, and you filed your tax return for the tax in question, that tax can be discharged once the 2-year and 3-year periods have expired.

For example, assume you owe $7,500 for 2012 income taxes, for which you submitted your tax return for that tax on the regular due date of April 15, 2013. Assume the tax was assessed as usual way back in 2013, and there’s no tax fraud involved. You met the 2-year condition as of April 16, 2015. You meet the 3-year condition by filing your bankruptcy case on or after April 16, 2016. That bankruptcy case would discharge the $7,500 income tax debt and it would be permanently out of your life.

 

Bankruptcy Timing: Include Income Taxes Owed for 2015 by Filing Chapter 13 in Early 2016

January 6th, 2016 at 2:00 am

As of January 1, 2016 you can include any taxes you owe for the 2015 tax year in your Chapter 13 payment plan.

 

If you’ve been thinking about filing bankruptcy, and expect to owe income taxes for 2015, you have an extra reason to file a Chapter 13 “adjustment of debts” now that we’re in the new year. That’s because now that 2016 has begun you can include income taxes owed for the 2015 tax year in your new Chapter 13 case and payment plan. Being able to include taxes owed for 2015 gives you significant advantages.

It saves you money, gives you crucial flexibility, and stops future tax liens and other tax collections.

Saves You Money

Including what you owe in income taxes for 2015 in a Chapter 13 payment plan saves you money because almost always you don’t have to pay any additional interest and penalties on the tax owed. The savings can be huge.

That’s particularly true if you have other debts that you want or need to be paid ahead of the 2015 tax. That would delay payment of the taxes owed for 2015. As a result the savings from not paying any accruing interest and penalties would be that much greater.

Under Chapter 13 you would have to pay the tax itself owed for 2015 as a “priority” debt. But you would have the entire length of your 3-to-5-year court-approved payment plan to do so. No interest or penalties on the tax would accrue during this entire time as long as you pay your plan payments as agreed and thereby complete the case successfully.

Gives You Flexibility

Including your 2015 taxes in your Chapter 13 payment plan gives you tremendous flexibility in the payment of that tax. That’s crucial when you have other debts that need to be paid, and need to be paid more urgently. These can include:

  • Home mortgage arrearage to prevent your home from being foreclosed
  • Unpaid home real estate taxes, which could also put your home in jeopardy and usually carry a high interest rate
  • Vehicle loan arrearage or the monthly payments themselves needed to keep your vehicle
  • Child or spousal support arrearage, to prevent garnishment and the loss of your driver’s and other licenses
  • Prior income taxes with recorded liens, to protect the home or other possessions encumbered by the attached liens

Besides the flexibility to pay other creditors ahead of the 2015 taxes, Chapter 13 also can let you change the amount of your monthly play payment (a single payment that covers all your creditors) to adjust to changes in your income and expenses.

Stops Future Tax Liens and Other Tax Collections

Including your 2015 income tax debt in a Chapter 13 plan stops the IRS and/or state from taking virtually any collection actions on the 2015 tax debt throughout the years of the Chapter 13 case. This lack of collection pressure allows you to take so long to pay this tax.

Preventing future tax liens from being recorded on the 2015 taxes is especially helpful. Tax liens are dangerous because they give the IRS/state a great amount of leverage, and put your assets at risk. Chapter 13 allows you to avoid the recording of tax liens while paying off the tax at your pace, a significant advantage.

Practical Situations This Is Very Helpful:

Being able to include 2015 income taxes in a Chapter 13 payment plan is especially helpful if you owe taxes for prior years and if you need to file a Chapter 13 case for other reasons.

1) Owe Other Income Taxes

If you owe for the 2015 tax year plus a prior year or more, you may well be in a vicious cycle. You may simply not be making enough money to pay your monthly debt payments, have enough for reasonable living expenses, while paying enough in income tax withholdings or quarterly estimated payments to keep up on current taxes. So you’re either making no headway or slipping further and further behind.

You may even be in a monthly installment plan with the IRS and/or state for prior unpaid income taxes. But as a result you can’t afford to pay enough ongoing tax withholdings or quarterly payments because of what you have to pay towards the installment plan. And you know that it’s a violation of that installment agreement to not stay current on subsequent tax years, so you’re afraid of what’s going to happen when the IRS/state finds out that you owe for 2015.

This vicious cycle is broken by filing a Chapter 13 case, and particularly doing so early in 2016. That’s because now the 2015 tax year can be incorporated into your Chapter 13 payment plan, giving you the savings and flexibility and other benefits summarized above for the taxes owed both for 2015 and for the prior tax year(s). Your new budget will include enough withholding or quarterly payments so you can stay current for 2016 and future years. You may not need to pay older income taxes at all or only a small percentage of them, and will likely not need to pay any ongoing interest and penalties on any of the taxes. And you’d end the Chapter 13 plan being completely tax-debt free.

2) Need Chapter 13 for Other Reasons

If you owe income taxes for the 2015 tax year only, and the amount is not very large, a Chapter 7 “straight bankruptcy” may discharge enough other debts so that afterwards you could afford to pay off the taxes through reasonable monthly installment payments acceptable to the IRS/state.

But that’s if you don’t have some other good reason to be in a Chapter 13 case. You may have debts that you would continue either owing or being behind on if you filed a Chapter 7 case, which would be better handled under Chapter 13. Examples are child/spousal support and home mortgage arrearages. You may need some of the specialized tools available only under Chapter 13, such as stripping a second mortgage from your home’s title, a “cramdown” on a vehicle loan, or preserving an asset that is not otherwise exempt from turnover to the bankruptcy trustee. In these and various other situations it’s helpful that the 2015 income tax debt can be incorporated into a Chapter 13 payment plan.

This way you will be protected from all of your creditors as you deal with them all without leaving any loose ends to cause problems later.

 

Bankruptcy Timing: Filing in 2016 to Write Off More Income Taxes with Chapter 13

January 4th, 2016 at 2:00 am

With Chapter 13 you may have to pay some part of the taxes that you could just discharge under Chapter 7, but it may be worth it.   

 

Last week just before New Year’s Day we showed how to discharge (legally write off) more of your tax debts (likely for the 2012 tax year) under a Chapter 7 “straight bankruptcy.” Today we show how that’s done under the Chapter 13 “adjustment of debts” form of consumer bankruptcy.

Dealing with Income Tax under Chapter 13

The most direct way bankruptcy deals with older income taxes is by quickly discharging them in a Chapter 7 case. As long as the tax meets the conditions for discharge, under Chapter 7 you would simply not legally owe the tax at all usually within about 4 months after filing the bankruptcy case.

But there are many circumstances in which a Chapter 13 case would be better for you than Chapter 7. Some of these circumstances involve income taxes and some so not.

You may owe some older income taxes which meet the conditions for discharge and some more recent income taxes that do not and so need to be paid. If the taxes that have to be paid are large, it’s often safer and/or saves you money by dealing with all of your taxes in a Chapter 13 case.

Or you may need a Chapter 13 case for reasons other than your income taxes, such as to save your home from foreclosure or to deal with a child support arrearage. Chapter 13 gives you extraordinary tools for dealing with these and a number of other special situations. It may be worth a potential disadvantage on the income tax side to have the advantage of those tools to meet your most important goal(s).

Dischargeable Taxes under Chapter 13

Be aware that the same rules apply to Chapter 13 that apply to Chapter 7 about which income taxes can be discharged. In most situations you can discharge older income taxes through Chapter 13 by meeting the following two conditions. The date of the bankruptcy filing must be both:

1) at least 3 years after the pertinent tax return was due (plus any time for extensions), and

2) at least 2 years after the tax return was actually submitted to the IRS or state tax agency. 

Some other possible conditions very seldom come into play—when there is tax litigation, offers in compromise, and other relatively rare procedural complications.

So most of the time if those two conditions are NOT met the tax must be paid in full, and Chapter 13 provides some very helpful advantages in doing so. But if those conditions ARE met, what happens to those taxes in Chapter 13?

What Happens to Dischargeable Taxes under Chapter 13

Simply put, income taxes that meet the conditions for discharge are lumped in with the rest of your “general unsecured” debts and paid whatever percentage those other debts are paid. Those taxes may be paid something or they may be paid nothing. Even if they are paid something, that may not increase what you have to pay during your Chapter 13 case. Let us explain what we mean.

0% Chapter 13 Plans

In many but not all parts of the country the bankruptcy court will approve a Chapter 13 payment plan in which all the money you pay goes to certain special creditors—those with debts secured by collateral and/or liens and those with “priority” debts that must be paid in full. That leaves nothing available during the length of the plan for the rest of the creditors—the “general unsecured” ones. Since income taxes that meet the conditions for discharge are in that “general unsecured” category, nothing is paid to them during the 3-to-5-year plan. If the case reaches a successful conclusion—mostly by all the plan payments being paid—then at that point all the dischargeable taxes are in fact discharged, without having being paid anything.

Chapter 13 Plans Which Aren’t Paid Any More in Spite of the Dischargeable Taxes

Even if when a Chapter 13 plan is designated to pay the “general unsecured” debts some percentage of what you owe, the fact that you have dischargeable income taxes often does not increase the money you would pay during the life of your plan. That’s because in many Chapter 13 cases you have only so much available to pay to all of your “general unsecured” debts. Adding your dischargeable income taxes to the “general unsecured” debts just reduces how much the rest of those debts are paid, without increasing the amount you pay.

An Example

Consider if you owe $30,000 in other “general unsecured” debts—credit cards and medical bills, for instance, and $10,000 in older income taxes that meet the conditions for discharge, a total of $40,000 in “general unsecured” debts. Assume that based on your income and expenses you have enough in your budget each month to pay into a Chapter 13 plan enough to catch up on a home mortgage, pay your vehicle loans, and pay off $15,000 in more recent “priority” income taxes that do not meet the “dischargeability” conditions and so must be paid in full. In addition, you have a little more “disposable income” adding up to a total of $5,000 over the entire course of the payment plan.

In this situation, the existence of the $10,000 in dischargeable income taxes would not affect the amount you’d have to pay into your Chapter 13 plan. Without these taxes, the available $5,000 would be distributed among the other $30,000 in “general unsecured” debts, thereby paying those about 17% of the amount owed ($5,000 divided by $30,000). When you add in the taxes, that same $5,000 would now be divided by $40,000, thereby paying about 12.5% of the amount owed. The amount paid to the “general unsecured” debts is not changed ($5,000); that money just gets distributed among more debts.

Either way, at the successful completion of the Chapter 13 the unpaid part of the “general unsecured” debts—including the $10,000 in taxes—would be discharged, forever written off.

Income Taxes Owed for 2012

This is all relevant to now particularly if you owe income taxes for the 2012 tax year. If so, you would meet the first of the above two conditions by waiting to file your Chapter 13 case until after April 15, 2016. That’s because at that point 3 years would have passed since that tax return was due.

This assumes you were not granted an extension to file that tax return. If an extension to file the return was granted to October 15, 2013, you’d have to wait to file the Chapter 13 case until after October 15, 2016 to meet this 3-year rule.

As to the second of the above two conditions, you’d meet it by waiting to file your Chapter 13 case until at least 2 years had passed since you submitted your 2012 tax return to the IRS/state. If you filed that return by the (non-extended) due date of April 15, 2013 then you would have already met this 2-year condition in April of last year. But you could have submitted the tax return a full year late—by April 15, 2014—and still meet this 2-year condition.

 

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