This week I’ve received 2 phone calls from a young lady questioning me about discharging her federal income tax in bankruptcy.
What’s the problem? Well, she came to see me for a consultation and I told her that her recent taxes were not dischargeable. Then she talked with a lady from the IRS who told her that she would be able to discharge these taxes in a Chapter 7 bankruptcy.
The young lady said, “The person at the IRS should know what they’re talking about … right?” Well, they should!
Here are the requirements for wiping out your federal or state tax debt in a Chapter 7 bankruptcy.
1. The taxes you are seeking to discharge must have first become due over 3 years previous to filing bankruptcy. The trick here is when do you start computing this 3 year period? You see, 2015 taxes don’t come due until 4-15-16. So you don’t start counting the 3 years until 4-15-16. However, if you requested a filing extension for your 2015 taxes, then you don’t start counting until later than 4-15-16. This can be tricky. Watch out.
2. You must have filed your tax returns at least 2 years previous to filing bankruptcy. Remember … when the IRS files your taxes for you it’s called an SFR (Substitute For Return). This is the IRS filing your taxes…not you filing your tax return. An SFR doesn’t count. If you didn’t file a tax return, then your past due taxes for that year can’t be discharged in bankruptcy – period!
3. Your taxes must have been assessed over 240 days previous to filing bankruptcy.
4. There was no fraud or willful tax evasion on your part. This is not a hard one to establish. Many people file a return, but they don’t have the money to pay. This is not fraud.
Other Important Factors To Consider
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- If the IRS has placed a lien on your residence you cannot avoid that lien in bankruptcy.
- The taxes you are seeking to discharge must be personal 1040 taxes … not employee withholding taxes. Older personal income taxes can be discharged in bankruptcy. Employee withholding taxes are never dischargeable in bankruptcy.
You must jump through all the hoops to discharge your past taxes. If you only get through all the hoops but one, you have a BIG FAT ZERO. You’ll still owe these taxes after you file a Chapter 7 bankruptcy.
Perhaps You Should Consider A Chapter 13 Bankruptcy
Taxes that are too recent to be discharged in bankruptcy are called priority taxes.
Chapter 13 bankruptcy is a great way to handle back due priority taxes. Yes, you must pay your priority taxes in full during the term of the Chapter 13 Plan. However:
- Interest and penalties don’t continue to build up, and
- You get the court protection against the IRS during the time of your Chapter 13 plan. Yes, even the IRS must obey the bankruptcy court. That means no garnishments, no bank levies, etc. by the IRS.
Perhaps you have some questions. You can reach my by phone at 760-523-9090. Or just click on the ORANGE “Contact Me” button at the top of your screen. I’ll contact you back and make arrangements to meet with you.
Talk with me. I’ll treat you like a friend.
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