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What Should I Know About Bankruptcy And Taxes?

Bankruptcy and Family Law Attorney in Coeur d’Alene

Serving Coeur d’Alene & Kootenai County Areas, including Coeur d’Alene • Hayden

Tax relief is available through bankruptcy. Beyond the fact that some taxes and the penalties associated with them can be discharged in a bankruptcy filing, the automatic stay that goes into effect upon filing for bankruptcy will stop collection actions on taxes owed, garnishment, and seizures, even from the IRS and state taxing authorities.

Taxes that are more than three years old can be discharged in bankruptcy. Taxes fewer than three years old cannot. This includes payroll taxes, and, in the case of state and local taxes (such as use taxes or sales taxes), may depend on whether the taxes in question are withholding taxes or excise taxes. Trust fund taxes are not dischargeable. Regardless of your tax situation, you should go over your tax issues with a tax professional prior to filing bankruptcy. However, bankruptcy is a powerful tool for settling disputes with creditors, including the IRS. For the most part, bankruptcy courts have no interest in settling tax disputes in a no-asset Chapter 7 filing, but in Chapter 13 filings, the court will decide tax disputes if your back taxes are being handled by your Chapter 13 plan and the trustee.

In Chapter 7 and Chapter 11 bankruptcy cases, you can get taxes discharged if the tax was due more than three years ago, if the tax return in question has been on file for at least two years, if the tax was assessed at least 240 days prior to filing, the filing was not fraudulent, and you did not willfully evade paying taxes. In a Chapter 13 filing, if the amount you owe in trust fund or recent taxes is too large to pay off under your plan, you may be able to get what’s known as an “Offer in Compromise.”

According to the IRS Code, a forgiveness of a debt constitutes income to the debtor, but the IRS has exceptions for bankruptcy discharge. After filing for bankruptcy and getting a discharge, you will usually go back to paying your own taxes and filing your own returns. However, in Chapter 13 cases where back taxes are due, your trustee may prepare your returns. How your taxes will be treated during and after bankruptcy differs depending on your case. Priority taxes within the last three years cannot be discharged and must be repaid under Chapter 13 and 11 plans, but penalties attached to those taxes are not generally considered priority, and may be paid off as a fraction of the actual penalty. Under Chapter 13, taxes do not accrue interest during the execution of the plan, and, if the plan goes through to completion, no post-filing interest comes due. If you never filed a return for the taxes you owe, they cannot be discharged, regardless of their age. This change comes from the 2005 bankruptcy amendments. A further change stemming from the 2005 amendments states that your case can be dismissed if you fail to file a return on time.

In Chapter 7, priority taxes fewer than three years old cannot, as previously mentioned, be discharged, and the penalties associated with those taxes will not be discharged, either. However, penalties associated with dischargeable taxes (those more than three years old and assessed 240 days prior to filing) are dischargeable, as are penalties associated with older taxes (more than three years before the bankruptcy filing) that aren’t part of the actual bankruptcy filing.

Tax liens are not affected by a Chapter 7 discharge. If the tax is dischargeable, the claim by the body to which the tax is owed is restricted to the actual property that has a tax lien on it. You can file a motion to ask the court to place a value on the lien if the value of the property is likely to be less than the amount held by the lien. If the lien is on a dischargeable tax, even if it is associated with some asset you own when you file for bankruptcy, it cannot be attached to an asset you acquire after bankruptcy. If the asset in question is of a type that loses value as time passes – rather than gaining it (in cases such as household items) – eventually, it will become worthless, and you might be able to simply ignore the lien. Further, there are some items that the IRS considers exempt from levies. Tax liens in Chapter 13 are paid through your plan. If you don’t have any assets with equity that the lien can be attached to, Chapter 13 can be used to get rid of the lien entirely and force it to be treated either as a priority claim or a non-priority claim. If the lien attaches to some asset that appreciates – such as a house or real property, for instance – Chapter 13 can be used to freeze the lien’s value to the amount at filing. Any appreciation in value after the fact, even during repayment under a Chapter 13 plan, is not subject to the lien, and, at the end of the plan’s term, the lien is paid and released. Interested in learning more on bankruptcy and taxes? Contact one of our bankruptcy or family law attorneys to schedule a free phone consultation.