Tax Forgiveness and Resolution

Can Tax Debt Be Discharged Through Bankruptcy?

Do you have back taxes owed to the Internal Revenue Service (IRS)? You may be eligible for tax forgiveness. While bankruptcy may help you discharge back taxes, interest, and penalties, there are several things you should know about tax forgiveness and bankruptcy regardless of your financial situation. Our bankruptcy attorneys can help you determine your eligibility. Call Allmand Law Firm, PLLC today at 214-884-4020.

Requirements For Discharging Tax Debt

Tax forgiveness has many requirements, but is a benefit of bankruptcy that many people do not consider. While it is true that many tax debts cannot be eliminated through bankruptcy; however, some can.

In order to discharge tax debt, you must meet the following criteria:

    • The tax in question should be income tax debt. Certain tax debt related to fraud penalties or payroll may not be discharged.
    • Tab debt must be at least three years old before filing. In other words, the tax debt should have been three years prior to your bankruptcy filing.
    • Debt must be assessed by the IRS at least 240 days prior to filing (also known as the 240-day rule). This may vary if collection attempts by the IRS were suspended or an offer in comprise was completed.
    • Tax returns must have been on file for at least two years before filing bankruptcy. In many cases, most tax returns for previous years should be filed. In some situations, you may not be able to file bankruptcy unless your tax returns are filed.
    • The taxes must be income taxes (payroll taxes and fraud penalties are not dischargeable).
    • You did not commit fraud or willful evasion of taxes.

To find out if your tax debt meets the requirements be discharged, one of our bankruptcy attorneys can help.

Reference:
https://www.nolo.com/legal-encyclopedia/bankruptcy-tax-debts-eliminating-29550.html

Can Tax Liens Be Discharged?

Even if your tax debt is dischargeable, prior federal tax liens on personal property may still be a problem. Most tax liens cannot be discharged in bankruptcy, including federal tax liens. Filing for Chapter 7 may be able to eliminate your tax debts if they meet all of the prior stated requirements. However, if the Internal Revenue Service (IRS) recorded a lien on your property prior to your filing bankruptcy, that tax lien will remain. Tax liens that are not discharged will continue to be owed at the end of a Chapter 7 case or repaid in full as part of your payment plan in a Chapter 13 case. Bankruptcy unfortunately does not wipe out tax liens recorded prior to filing. While a debt may be wiped out, a lien on your property that is recorded prior to filing will remain on the property.

What Types of Tax Debt May Not Be Discharged?

Although older tax debt that meets the requirements listed above may be discharged, there are some types of tax debt that may not be dischargeable. Those include the following:

    • Tax liens on any personal property;
    • Property taxes payable within one year of your bankruptcy filing;
    • Taxes that were withheld or collected by a third party;
    • Employment taxes, such as excise taxes, custom duties, and others;
    • Tax penalties that are non-punitive in nature; and
    • Tax refunds that were erroneously paid to you.

If you own a business or operated as a business, there are many types of priority tax debt that may not be discharged, including:

    • Income taxes you withhold from paychecks, often called trust fund taxes (FICA, Medicare, etc.);
    • Sales tax that you collected from clients or customers; and
    • Other taxes related to your business and non-dischargeable funds.

It can be difficult to know if your tax debt is eligible for tax forgiveness. A skilled lawyer can look at your taxes and let you know if they can be discharged. Even if you do not qualify for tax forgiveness, a tax lawyer can help you manage the legal aspects of your case and deal with the IRS for you.

How Tax Debt Is Treated in Chapter 7 and Chapter 13 Bankruptcy

Provided that your tax debt meets the requirements to be discharged, you may be eligible to file under Chapter 7, Chapter 11 or Chapter 13.

    • In Chapter 7 bankruptcy, an “automatic stay” is enacted which immediately stops creditor collections. Debt should be discharged about 90 days after the case is opened. Only after debts are discharged can the IRS pursue collection. However, you may be able to eliminate the tax debt through discharge, stopping the IRS from collection efforts. During the interim, you can plan for repaying any debt that is not discharged.
    • In Chapter 13 bankruptcy, or “reorganization bankruptcy,” you have time to repay what you owe in smaller amounts. Some debts can be discharged through Chapter 13 bankruptcy as well.

Make sure you choose the right bankruptcy solution for tax forgiveness by speaking to a lawyer today.

References:
Chapter 7: https://www.irs.gov/businesses/small-businesses-self-employed/chapter-7-bankruptcy-liquidation-under-the-bankruptcy-code
Chapter 13: https://www.irs.gov/businesses/small-businesses-self-employed/chapter-13-bankruptcy-voluntary-reorganization-of-debt-for-individuals

Put an Automatic Stay on the IRS

When you file Chapter 7 or Chapter 13, the court will issue an order calling for an “automatic stay.” This stops creditors, including the IRS, from harassing you for your debts. They are no longer allowed to send you letters, garnish wages, pull funds from your bank accounts, file liens against your property, and call you on the telephone.

A stay may only be lifted by creditor request and for good reason. Reasons may include incurring debt after you filed bankruptcy, you have filed multiple bankruptcies, or you engaged in fraudulent activity. The automatic stay will be in place throughout your bankruptcy procedures. Your creditors may only contact your lawyer or attend the Meeting of Creditors to address you in person.

After your bankruptcy has concluded, your creditors, including the IRS, may resume collection procedures. However, if you obtained tax forgiveness through a discharge of what you owed, the IRS will no longer pursue you for past due taxes.

References:
Automatic Stay: https://www.irs.gov/irm/part5/irm_05-017-008#idm140659811659104
Meeting of Creditors: https://www.irs.gov/irm/part5/irm_05-009-002#idm140086572000768

What Happens to Tax Debt That Is Not Discharged?

Not all income taxes are eligible for tax forgiveness or discharge. If you have tax debt that is not dischargeable, you may have to deal with it in a different manner. A tax forgiveness lawyer can evaluate your situation and help you understand your options.

If you filed Chapter 7 bankruptcy, you will have an automatic stay to stop IRS collection processes during the bankruptcy. However, between three months and six months later, when the case has concluded, the IRS may resume collection efforts. Any taxes not discharged may be negotiated with the IRS or a payment play may be established. A skilled bankruptcy attorney can help you with IRS tax debt that is not eligible for tax forgiveness.

If you filed Chapter 13 bankruptcy, your non-dischargeable tax debt may be managed through your payment plan. Chapter 13 utilizes a three- to five-year payment plan to reorganize your debt. Any tax debt that is not eligible for tax forgiveness may also be included in that payment plan.

Regardless or whether or not you are eligible to discharge any tax debt, debtors filing bankruptcy are required to disclose their tax refund, even if it is only an estimate based on previous years.

References:
https://www.law.cornell.edu/wex/dischargeable_debts
IRS Tax Debt Relief: https://www.irs.gov/pub/irs-utl/2013_NTF_Bankruptcy_Relief.pdf

Speak With a Texas Bankruptcy Lawyer for Free

Speak with our bankruptcy attorneys in Texas about the options best-suited for your situation. We can work with you find a way to help you resolve tax liens, wage levies, and even to remove existing tax liens. We’re here to guide you through this process. Schedule a free consultation to discuss your debt relief options. We’ve helped tens of thousands of clients resolve their debt, and we’re ready to help you too.

You can reach Allmand Law Firm, PLLC at (214) 884-4020 – give us a call today!