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The 4 Conditions for Discharging Tax Debt in Bankruptcy

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Income tax debt is the only type of tax debt that may be dischargeable in bankruptcy. To meet the requirements for discharge, the debt must fulfill the following 4 conditions. Understanding these conditions is key to determining if your tax debt can be discharged in a Chapter 7 bankruptcy.

  1. Three Years Since Tax Return Due Date: The taxing authority, such as the IRS, has three years from the date the tax return was due to collect the income tax debt. This time period is based on the fixed date of the tax return filing and is not affected by the taxpayer’s actions or the tax authority’s actions.
  2. Two Years Since Tax Return Filed: The second condition measures the time since the tax return was actually filed by the taxpayer. The dischargeability of the debt may depend on the state in which the taxpayer resides, as some states allow for late tax returns to still be discharged if at least two years have passed since the filing.
  3. 240 Days Since Assessment: Assessment is the tax authority‘s formal determination of the taxpayer’s tax liability. The 240-day period begins after the tax has been assessed, allowing the tax authority time to collect the debt if it was delayed during an audit or offer-in-compromise process.
  4. Fraudulent Tax Returns and Tax Evasion: If the taxpayer was intentionally dishonest on their tax return or tried to avoid paying taxes, the tax authority has no opportunity to collect the debt, and it cannot be discharged in bankruptcy.

It’s important to note that if the tax debt does not meet all four of these conditions, it may not be dischargeable in bankruptcy. Additionally, taxes from operating a business, non-income taxes, and taxes with recorded tax liens may also not be dischargeable.

By understanding these four conditions, taxpayers can make informed decisions regarding the dischargeability of their tax debt in bankruptcy.

Book a free telephone consultation with attorney Jennifer N. Weil here: https://jenniferweil07030.setmore.com/.

Discharging Income Taxes In Bankruptcy

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Introduction

Dispelling common myths surrounding income-tax debts is crucial for making informed financial decisions. While Chapter 13 bankruptcy is often associated with a prolonged repayment plan, the reality is that various options exist, and each individual’s situation is unique. Let’s explore the truth behind these myths and how a personalized approach can guide you towards the most effective solution.

Myth 1: Chapter 13 is the Only Solution for Income-Tax Debts

Contrary to popular belief, filing for Chapter 13 bankruptcy isn’t the sole solution for handling income-tax debts. The myth persists because Chapter 13 is indeed an excellent option for certain cases. However, the key lies in understanding the specifics of your situation, which requires a tailored evaluation by an experienced attorney.

Myth 2: Income Tax Debts Cannot Be Discharged in Bankruptcy

While it’s true that not all income-tax debts are dischargeable, the blanket statement that they cannot be discharged is a myth. There are conditions that, if met, allow for the discharge of income-tax debts. An attorney, equipped with your tax account transcripts, can assess each tax year individually to determine eligibility for discharge.

Navigating Chapter 7 vs. Chapter 13

Determining whether Chapter 7 or Chapter 13 is more suitable depends on various factors, including the recency of the income-tax debt. Chapter 13 may be preferable for recent debts, offering a chance to avoid penalties and interest. However, if most of your tax debts are dischargeable, Chapter 7 might be a more favorable option based on your overall financial circumstances.

Conditions for Discharging Income Tax Debt

Understanding the conditions for discharging income-tax debt in Chapter 7 is crucial. This includes meeting criteria such as the tax return due date, filing date, assessment period, and avoiding fraudulent activities. These factors, when evaluated by an attorney, contribute to a well-informed decision.

Conclusion

Debunking myths and understanding the nuanced conditions for dealing with income-tax debts requires a personalized approach. Consultation with a knowledgeable attorney, like Jennifer Weil, Esq., ensures a thorough evaluation of your specific circumstances.

Schedule a free bankruptcy consultation with Jennifer Weil, a New Jersey bankruptcy attorney, to discuss your options.

Writing Off Income Taxes Forever through Bankruptcy

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Writing off income taxes forever through bankruptcy

Writing off income taxes forever through bankruptcy? Yes, it’s possible. What income taxes can a Chapter 7 bankruptcy completely write off?

It takes meeting at least four criteria.

But before I list and describe these, I have to emphasize that this whole area—dealing with tax debts in bankruptcy—is a very complex one. I present the information in these blogs to you because the more you know the better. But part of being informed is knowing when you definitely need an attorney’s help. So, part of my job is to make very clear when you are in a particularly difficult area, when you truly need the help of someone who spends his or her professional life thoroughly understanding the complex rules, and constantly applying them in the real world. This is clearly one of those areas.

And now on to those four minimum criteria for writing off income taxes in bankruptcy:

1. Has three years passed since the tax return was due?

This one is pretty straightforward, because every income tax debt has a due date for the filing of its tax return. The important twist here: if you requested an extension of time—usually from April 15 to October 15—the three-year period does not begin until the extended due date.

2. Has two years passed since the applicable tax return was actually filed?

It does not matter how ancient the tax is if at least two years have not passed since the return was in fact filed. And a “substitute for return”—the common procedure in which the IRS in effect prepares a tax return on your behalf based on the (usually incomplete) information it has available—that doesn’t count as a filed return for this purpose.

3. Has 240 days passed since the assessment of the tax?

In most situations, an income tax is assessed within a few weeks after you file it. Assessment is the tax authority’s formal determination of your tax liability, usually through its review and acceptance of your tax return. But sometimes the amount of tax is in dispute because of a tax audit or litigation about the amount. By the time the accurate tax amount is finally assessed, the above three-year or two-year time periods may have passed, but that tax cannot be written off unless that bankruptcy case is filed more than 240 days after the assessment. This 240-day period is also put on hold while a taxpayer’s “offer in compromise” is pending. Just like it sounds, that’s an offer to the IRS to settle the tax for less money or for specific payment terms.

4. Have you filed a fraudulent tax return or intentionally attempted to evade the tax?

Even if all the required time periods have passed, if you were dishonest on your tax return—such as not including some of your income or claiming invalid deductions–or tried to avoid paying a tax in some other way, that tax will not be written off in bankruptcy.

This discussion should give you a good idea of whether any or all of your income tax debts can be written off in bankruptcy. And in some cases applying these four conditions will give you an accurate answer. But there are some other considerations that can come into play. What if the IRS recorded a tax lien against your home and on your personal possessions?  How would a prior bankruptcy affect these timing rules? What about your appeal of a tax? What’s considered an honest mistake on a tax return instead of intentional tax evasion? When can the taxing authority add a 30-day “tack-on” to the 240-day rule?

Bankruptcy can certainly write off income taxes under the right circumstances, but you need to have an experienced attorney review your personal situation to see if you truly meet those circumstances.

If you need a New Jersey bankruptcy attorney to help determine whether your income tax debt is dischargeable in bankruptcy, schedule a telephone consultation with attorney Jennifer Weil online at this Setmore page, or by calling (201) 676-0722.

Photo by StockMonkeys.com.

Taxes and bankruptcy – debunking a myth

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2334280048_61c3a13b9a_zLots of people think, “bankruptcy can’t help me with my tax debt.”

Lumping tax debts in with child support and alimony—which indeed cannot be legally written off, or discharged—is wrong. But taxes and bankruptcy can be confusing, because these are complicated areas of law.

The fact is that bankruptcy can discharge taxes of many types and in many situations. Sometimes ALL of a taxpayer’s taxes can be discharged, or most of them. But there ARE significant limitations.

Even if you cannot discharge your taxes in bankruptcy, filing a bankruptcy case can still help by:

1. Keeping the taxing authorities from garnishing your wages and bank accounts, and from “levying on” (seizing) your personal and business assets.

2. Stopping them from filing tax liens and from piling on greater penalties and interest.

3. Avoiding monthly tax payments, all the while penalties and interest continue to accrue.

Overall, bankruptcy gives you breathing room from your creditors, including the IRS, or the state or local taxing authority, that you can’t get any other way. It gives you a lot more control over a very powerful class of creditors. And your tax problems are resolved as part of your whole financial package, so you don’t find yourself working hard to deal with your taxes while worrying about being blindsided by other creditors.

If you have tax debt or any other kind of unmanageable debt, call me for a consultation: (201) 676-0722, or email me at weilattorney@gmail.com.

 

Photo credit: Liquidnight

THE Goal of Bankruptcy: Discharge of Your Debts

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5708755837_b5af43415d_zMost, but not all, debts are written off, or “discharged,” in a bankruptcy case. Is there a simple way to know what will and what will not be discharged in a Chapter 7 bankruptcy?

No, not really.

I can give you a list of the categories of debts that can’t, or might not, be discharged, but some of those categories don’t have clear boundaries, and some depend on whether a creditor is going to challenge the discharge and how a judge might rule.

But why can’t it be simple? Here’s what you need to know:

1)  All debts are discharged, EXCEPT for those that fit within an exception.

2)  There ARE a lot of exceptions, BUT if you tell your attorney everything, you are likely to discover whether you have any debts that may not be discharged. Surprises are rare.

3)  Some debts are never discharged, NO MATTER WHAT: for example, child or spousal support, criminal fines and fees, and withholding taxes.

4)  Some debts are never discharged, but THAT’S ONLY IF the particular debt fits certain conditions: for example, income taxes, depending on conditions like how long ago the taxes were due and when the tax return was filed; and student loans, as long as conditions of “undue hardship” are not met.

5) Some debts are discharged, UNLESS timely challenged by the creditor and resulting in a ruling by the judge that the debt meets certain conditions involving fraud, misrepresentation, larceny, embezzlement, or intentional injury to person or property.

6)  A few debts (used to be many more) can’t be discharged in Chapter 7, BUT can be in Chapter 13: for example, divorce debts other than support.

The bad news: as simple as I would like to make it, determining what debts aren’t dischargeable isn’t simple. But there’s more good news than bad. First, for many people all the debts they want to discharge WILL be discharged. Second, an experienced bankruptcy attorney can predict which of your debts will be discharged. And third, if you have troublesome nondischargeable debts, Chapter 13 can be a decent way to keep those under control.

If you are in New Jersey and looking into bankruptcy, call Jennifer Weil now to schedule a consultation: (201) 676-0722.

 

Photo credit: Jason Meredith

How to keep an income tax refund in your Chapter 7 bankruptcy

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Can you keep your tax refund through a Chapter 7 bankruptcy?  Maybe.

Everything you own when your Chapter 7 is filed makes up your “bankruptcy estate.”  Usually, most or all of that “estate” stays in your possession and you can keep it because it’s exempt (protected).  The bankruptcy estate includes not only your tangible, physical possessions, but also intangible ones—assets you own that you can’t physically touch—such as money owed, but not yet paid, to you.  A tax refund can be an intangible asset that is part of your bankruptcy estate.  Whether you can keep the tax refund depends on whether it is exempt.

Because an income tax refund usually comes from the overpayment of payroll withholding, the full amount of that refund has accrued by the time of your last payroll withholding of the tax year. So even though nobody knows the amount of your refund until your tax return is prepared a few weeks or months later, for bankruptcy purposes it is an asset of yours by January 1 of the next year.  If you file a Chapter 7 case after the beginning of the next year and before you have received your tax refund, it is part of your bankruptcy estate and the trustee can keep however much of it that’s not exempt. This is also true if you have received the refund and not done anything with it (like if you haven’t deposited the check).

You can avoid possibly having a non-exempt tax refund by filing your tax return, receiving the refund, and appropriately spending it before your Chapter 7 case is filed.  But first, you should seek advice from a bankruptcy attorney.  Your bankruptcy trustee will be interested in what money you receive and spend before bankruptcy, which can be a source of problems if it is not done carefully.

Whether or not your tax refund is exempt depends on how much it is and whether you have room to exempt it.  In some cases, using all or part of an exemption for your tax refund may reduce the availability of the exemption for other assets.  Even if the refund, or a portion of it, is not exempt, the Chapter 7 trustee might not claim it if he or she decides the amount is not enough to open an asset case.  That would be a case where the amount of refund is so small that the benefit of distributing it to the creditors is outweighed by the administrative cost involved.  This threshold amount can vary from one court and/or one trustee to another so be sure to discuss this with your attorney.  But if the trustee is collecting any of your other assets, then he or she will want every dollar of a non-exempt tax refunds.

There is a risk that you will not be able to claim an exemption if you don’t list the tax refund in your bankruptcy papers.  Be sure to always list any tax refund to which you may be entitled.

These same principles apply year-round.  By of July 1, you have had half a year of income-tax withholding deducted from your paychecks.  A bankruptcy filed on on or after July 1 should take that into account, even though some trustees don’t push this issue much until closer to the end of the year, when of the potential tax refunds has accrued.  Nevertheless, you should tell your bankruptcy attorney about income tax refunds expected in the next year, especially if you have a history of fairly large tax refunds.

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