Tax Considerations

Bankruptcy is a complex subject with effects on nearly every aspect of personal and financial planning, including loan eligibility, credit scoring, debt, and property ownership. While most individuals realize that the primary goal of bankruptcy is to alleviate debt, few are aware of the potential benefits of bankruptcy when it comes to tax debt. Before filing bankruptcy, it’s imperative to consult with a knowledgeable and seasoned bankruptcy attorney who can explainwhat bankruptcy entails, how it affects taxes, and how you can look out for your best interests. At San Diego Bankruptcy Attorney, we can help you with all aspects of bankruptcy, including tax considerations. We take time to explain possible income tax ramification and how certain taxes can be discharged. We know how bankruptcy and tax laws apply to your situation and can conduct an analysis of your tax liabilities to help you determine if bankruptcy is a good option for resolving your IRS and state tax problems. Call us today at 619-488-6168 or fill our online contact form to start this analysis.

Tax Debts and the IRS

Failure to pay taxes can result in the government establishing a lien on your property and garnishing your wages. So, you’ll want to pay your taxes on time to avoid dealing with a federal tax debt collection. But if you’re facing tough economic times, it’s important to contact the Internal Revenue Service(IRS) before you’re late on filing your taxes. Depending on the facts of your case, the IRS may allow you several months to clearyour tax arrears. Letting the IRS know in advance if you’ll need more time to file or pay off your taxes is the bestway to avoida debt collecting action. In some incidents, people experiencing hard economic times may require only a few months to have things back to normal.

In addition, debtors facing hard economic times may want to contact the IRS concerning a repayment program. This program allows debtors to pay back their taxes over a certain period of time. In this case, you’ll be required to contact the IRS and explain your economic situation.Tax debt is one of the most challenging types of debts to discharge in bankruptcy. For this reason, it’s important to speak with the IRS about establishing a repayment program if you have late tax payments.

And if you’re certain that your situation will not get better anytime soon, consider seeking advice from an experienced San Diego Bankruptcy Attorney. While bankruptcy may not clear all your tax debts, it may help discharge a significant portion. It also gives you the opportunity to discharge the debt incurred from income taxes. However, some taxes may not be discharged, especially the Federal Insurance Contributions Act taxes. You can as well create a bankruptcy repayment program to allow you to repay all your tax debts. If you’ve incurred a significant tax debt and are filing for bankruptcy, filing a Chapter 13 Bankruptcy could help youreorganize your debt into a repayment program of three to five years.

Types of Dischargeable Taxes in a Bankruptcy

Bankruptcy doesn’t discharge all forms of tax debts. Individuals whose tax debts are mainly from FICA taxation, won’t be able to discharge this kind of debt. The primary relevant factors to determine dischargeability include:

  • The date that tax was owed, which is calculated from the date the returns were last due to be filed,
  • When you filed your returns,
  • The date of assessment of the taxes as determined by the taxing agency,
  • Whether you intentionally tried to avoid paying taxes or were involved in tax fraud,
  • and other information pertaining to your financial history

If you want a portion of your debt discharged, you’ll need to file a Chapter 7 bankruptcy. Qualifying for this type of bankruptcy requires the debtor to pass a means. You may not pass a means test if you have enough disposable income at end of the month or earn more than the median household in California. You may want to consider a Chapter 13 bankruptcy if you fail to meet the requirements of Chapter 7. While a Chapter 13discharge does not work as well as Chapter 7, it still provides many of the same protection and allows an individual to establish a repayment program when going through hard economic times. Chapter 13 offers automatic stay protection to the debtor and this means that you can still get bankruptcy protection by other means even if you’re not eligible for Chapter 7.

If you’re considering filing a Chapter 7 bankruptcy and can pass the means test, you’ll qualify for the discharge of a big portion of your debt. What’s more, you may be able to keep more property once your Chapter 7 bankruptcy is finalized. Most people who consider a Chapter 7 bankruptcy usually have large consumer debts, tax debts, or medical bills that may never be paid off. Discharging taxes may not always be possible, but if you want to take this route, your best bet is to consult with a bankruptcy attorney. It’s also worth noting that certain courts will never allow you to discharge your tax debt once you fail to file your taxes. Speak with a San Diego Bankruptcy Attorney today if you want to receive an honest opinion about yourcase.

Chapter 7 vs. Chapter 13

Chapter 7 allows for the full discharge of allowable debts and this is why it’s sometimes referred to as “straight” bankruptcy. With this, the court takes full control of your property and liquidates them to offset as much debt as possible. If the court finds that your assets are not sufficient to cover all your debts, you’ll not be liable for the unpaid balances. Chapter 13, on the other hand, is a court-approved, multi-year payment plan that allows you to pay off your debts to the extent possible. Chapter 13’s primary goal is to have you repay your debts in full, though some unpaid balances may be dischargeable.

Both Chapter 7 and Chapter 13bankruptcies consider tax debts as “priority” debts. As such, they are paid first when assets are liquidated in Chapter 7. In the Chapter 13 payment plan, tax debts must be addressed and paid in full. This means that tax debts in most Chapter 13 cases are not dischargeable. Also, Chapter 13 can be filed even if the taxpayer had in the past received a Chapter 7 tax discharge, whereas a six-year period must elapse between the filing of Chapter 7 bankruptcies. As stipulated in the Internal Revenue Code Section 6658, Chapter 7 cases can be open about 6 months but a Chapter 13 that can last for 5 years.

Five Rules to Discharge Tax Debt

Tax debts are usually associated with a certain tax year and tax return.  The specific rules on the condition of an old tax debt before it can be discharged are laid out in the bankruptcy law. Your income tax debt is dischargeable in Chapter 7 bankruptcy if it satisfies all these five rules:

  • The due date for filing the particular tax return was at least 3 years ago

For the taxpayer to be eligible to file for bankruptcy, the tax debts must be related to a tax return that is at least three years old from the last filing date. The due date includes any extensions, meaning that if you requested and received an extension, you would not be able to include the tax return in bankruptcy until at least 3 years have passed since the extension date. For instance, if you wish to discharge tax debt for your 2017 tax return and say you filed your taxes on April 15, 2018, you will have to wait until April 15, 2021, to include your income tax debt in bankruptcy.

  • The tax return was filed at least 2 years ago

In addition, the tax debt must be linked related to a tax return that you filed at least two years prior to filing for bankruptcy. This is typically measured from the actual date that you filed the return. For instance, if your taxes were due on April 2016 but you filed a tax return on January 2017, you’ll not be able to include the tax debts in bankruptcy until two years after the date you filed. In this case, you’d have to wait until April 2019 that is, two years after January 2017 and then followed by three years after April 2016.If you fail to file your taxes when they are due and don’t request an extension, the tax debts that arise from the unfiledreturns may never be discharged. This is an important aspect since unfiled tax returns are routinely assessed by the IRS. The tax liabilities can only be discharged when you file a tax return for the year in question.

There may be issues if a taxpayer does not file a tax return, resulting in the issuance of a notice of deficiency by the IRS. Once 90 days pass after the issuance of this notice, the IRS will commence with tax collection. In this case, the tax is nondischargeable because no return was ever filed. Filing a tax return even if the tax has only been assessed by the IRS is a possible solution to begin the running of the two-year period.

  • The tax return was not fraudulent

The tax return must not be duplicitous or frivolous in any way. Simply put, you cannot claim your property as independent and immediately IRS calls on you, you file for bankruptcy

  • The IRS tax assessment is at least 240 days old

The IRS must have assessed your taxes at least 240 daysbefore filing for bankruptcy. This requirement covers the same ground as the aforementioned two rules. The IRS assessment can arise from an IRS proposed assessment that becomesfinal, an IRS final determination in an audit, or a self-reported balance due. In this assessment, the IRS gives you a report of exactly what you owe. The tax assessment date is not when a taxpayer files his/her return, but the date the IRS officer signs the summary record of assessment entering a tax liability on the records. It’s not unusual for there to be a delay in the assessment and it’s therefore important to obtain an assessment record from the IRS prior to filing a bankruptcy petition.

  • You’re not guilty of tax evasion and the tax return was not fraudulent

When filing bankruptcy to have your tax debts discharged, you must not be guilty of intentional tax evasion. In addition, the tax return cannot be frivolous or fraudulent. For instance, you cannot include your dog as a dependent and then file bankruptcy when the IRS comes calling.

Improper claiming of tax credits, underreported income, delinquent returns, and unfiled returns are some common examples ofbadges of fraud or tax fraud indicators that the IRS may take as a sign ofintentional evasion of taxes. If a debtor has truly engaged in tax fraud, encountering a problem when filing for bankruptcy should not be a legal concern. Tax evasion is a federal crime and for this reason, the debtor could be at risk of prosecution. Not to mention that criminal penalties include high fines, prison time, probation, and in some cases, hefty civil fraud penalties.

The burden of proof is on the IRS to provide convincing evidence to show fraud. However, when it comes to preventing the discharge of tax liability, the IRS must only provide a preponderance of the evidence.Debtors who’d like to file bankruptcy but have a history of tax fraud or tax evasion may want to first consider an offshore/domestic voluntary disclosure to get an assessment of the preceding years and then enter a timed (aged) bankruptcy. However, this option cannot be guaranteed since an individual gets to admit that he/she has been involved in tax fraud. Individuals with a history of non-filing tax returns may file all delinquent returns, get them evaluated, and then enter a properly timed bankruptcy. This approach can also not be guaranteed. It’s therefore important to consult with a competent bankruptcy tax considerations attorney if you’re in either of these situations.

Other rules

As the bankruptcy petitioner, you must show that tax returns for the preceding 4 years have been filed with the IRS before bankruptcy can be approved. The four preceding returns must be filed on or before the date of the first creditors’ meeting in your bankruptcy case. Furthermore, you must submit a copy of your most recent tax return to the bankruptcy court. You’re also required to provide a copy of the tax return to your creditors if requested.

A tax lien may also arise upon the IRS assessment and this means that the tax is not considered to be secured unless the IRS files a valid tax lien prior to bankruptcy. For a lien to be valid as to real property in California, it must be recorded in the county in which the property is located. And if the liability exceeds the value of the property, only a portion of the debt to the IRS will be secured. An issue associated with this is exempt property. Although most of the debtor’s property is liquidated to pay off debts, there are certain assets that one is allowed to retain. In California, the equity in the taxpayer’s home is exempt property and creditors cannot seize it to satisfy their debts. This rule, however, changes with the IRS because it may collect nondischargeable taxes from such properties.

By the time a tax qualifies for discharge, it will have accumulated penalties and interests, which may exceed the actual amount of tax owed. The courts have held that the interest is dischargeable if the tax is dischargeable, and the opposite is true. But when it comes to penalties, only non-pecuniary loss penalties can be discharged. These are punitive penalties that do not compensate the government for pecuniary loss. Examples are fraud, accuracy, and negligence-related penalties. The IRS may treat a pecuniary loss penalty like the tax itself.Three Circuit Courts of Appeal have held that even if the tax is not dischargeable, tax penalties may be dischargeable if they are related to tax periods more than 3-years prior to filing.

Finding a Bankruptcy Tax Considerations Attorney Near Me

Bankruptcy tax considerations are extremely tricky and working with a skilled and experienced bankruptcy attorney is the only way to correctly determine if your taxes are dischargeable. The lawyers at San Diego Bankruptcy Attorney have specialized knowledge in this area and can help you consider the financial options, the tax ramifications and how to prioritize debt appropriately. Determining your options will include obtaining an official tax transcript from the taxing agency.

While bankruptcy may still carry a certain stigma, the financial benefits it offers, especially when it comes to tax debts, may be too great to ignore.If you’re dealing with the fallout of the tax consequences, the most important thing to do is to investigate bankruptcy as a potential alternative to dealing with tax debts. This is especially imperative if it’s been 3 years since you last filed the taxes for the years you owe.

For a free consultation on your bankruptcy and tax considerations needs, contact our San Diego Bankruptcy Attorney at 619-488-6168. We are a debt relief law firm and can put our experience handling bankruptcy cases in analyzing your tax consequences and your eligibility for a discharge of tax debt.

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