Discharging qualified tax debt in Chapter 7 and 13 bankruptcies

Good people with bad income tax debt can discharge that tax debt in Chapter 7 and 13 bankruptcy cases if it is qualified tax debt according to the Internal Revenue Code. There are a large number of people who prepare their income tax returns every year and find out they owe the IRS. There may be payment plans the taxpayer can negotiate with the IRS when the money is not there to pay the tax bill. Despite the best-made payment plans, sometimes tax debtors cannot afford to make the scheduled payments. When tax debt is not paid, the IRS begins collection actions.

While W-2 wage earners have income taxes automatically withheld from their regular paychecks, the self-employed and small business owners are responsible for tracking their income and expenses and making estimated quarterly income tax payments. Problems such as recordkeeping errors or misplaced financial statements and receipts can delay the taxpayer from making their timely payments and some people miss IRS tax due dates, some eventually becoming years behind in filing and paying taxes. Tax penalties and interest are charged on tax debt every month.

The same work and income problems that lead to inability to pay mortgages, car loans and credit cards also affect people with tax debt they cannot pay. Bankruptcy Chapters 7 and 13 can solve a debt crisis.

Generally, tax debt is not dischargeable in bankruptcy, however, when five requirements are met, that qualified tax debt can be partially or fully wiped out or repaid over time.

  1. Income tax debt, interest and penalties may be dischargeable. Payroll tax and fraud penalties however are not dischargeable.
  2. Any income tax fraud or willful evasion will disqualify the tax debt from being dischargeable. Fraudulently using a false and social security number, for example, to evade paying taxes or purposely reporting less income than earned or deducting false expenses eliminates bankruptcy discharge eligibility.
  3. The income tax debt must be at least three years old to qualify for bankruptcy discharge. The tax return must have originally been due three or more years ago at the time of the bankruptcy filing.
  4. A tax return must have been filed for the income tax debt the bankruptcy filer wants to discharge. When returns are not filed, the IRS may record an estimated return. Even if the IRS seeks to collect tax debt on their estimated return, the debt is not dischargeable unless the taxpayer has filed an actual tax return.
  5. The 240-day rule is satisfied. To be dischargeable in bankruptcy court, the income tax debt must have been originally assessed at least 240 days prior to the filing for bankruptcy.

Even if a taxpayer’s income tax debt meets the five requirements for discharge in bankruptcy, a tax lien, placed on property, will not be extinguished, even if the underlying tax debt was forgiven in bankruptcy. Federal tax liens have to be paid before the property can be sold.

Assuming a taxpayer meets the five requirements to discharge income tax debt, the individual must qualify for either Chapter 7 or Chapter 13 bankruptcy. Chapter 7 (full discharge) requires the filer meet the income means test, determining if the individual’s income allows them to file for full discharge. The alternative is Chapter 13 (reorganization) which allows partial or full debts to be repaid over a three to five years, allowing the individual to catch up on debts over time.

Joseph Wrobel, Ltd. attorneys can help people by reviewing income and finances to determine whether they qualify for Chapter 7 or Chapter 13 bankruptcy. They can also review and advise on whether income tax debt, interest and penalties qualifies for discharge.

Joseph Wrobel, Ltd. helps people get control of their finances and a fresh start at financial freedom. The firm’s website contains informative videos about financial issues as well as bankruptcy protection for families who want a fresh start. To keep in touch and read about consumer finance news and stories you can “Like” the firm’s Facebook page and “Follow” Joseph Wrobel. Ltd. on Twitter. If you need immediate legal assistance, please call Joseph Wrobel, Ltd. by calling (312) 781-0996 to talk to an attorney today.