By the time an individual reaches the point of filing for bankruptcy, he or she is likely inundated with all types of consumer debt, ranging from medical debt to credit card debt and possibly, tax debt. While a consumer bankruptcy case will eliminate a large portion of this debt, tax debt is not normally included in this list.
Taxes fall into the category of “non-dischargeable priority debt,” which means that the bankruptcy case will not eliminate them. Additionally, repayment of these claims is given priority over other creditors’ claims. However, circumstances do exist where tax debt can be discharged with a bankruptcy filing, but certain requirements must exist before that can happen.
For the tax debt to be discharged, it must be an income tax debt, including unpaid federal or state income taxes. The debt also must be old, meaning at least three years must have passed since the original tax return was due. More specifically, the tax return must have been due at least three years before the date the bankruptcy case was filed.
The person pursuing the debt discharge must also have filed a valid tax return for the debt at least two years before filing for bankruptcy. The tax return must have been submitted in a timely manner. If the filer requested a filing extension and received it, filing it by the extension deadline is also considered timely.
Additionally, the IRS must have assessed the tax debt, which means that it was recorded on the agency’s books, for at least 240 days before the bankruptcy case was filed. However, circumstances exist where the IRS has not assessed the debt yet and the requirement can still be met.
Bankruptcy courts will not allow the tax debt to be discharged if the filer evaded taxes or filed a fraudulent tax return. Also, if the IRS has filed a tax lien on the filer’s assets to collect on the debt, a bankruptcy filing will not lift it. Many bankruptcy filers encounter this obstacle when attempting to discharge an income tax debt.
The most used form of bankruptcy used to discharge a tax debt is Chapter 13, otherwise known as a reorganization bankruptcy. This form of bankruptcy allows the consumer to pay off his or her debts over the course of three to five years through a repayment plan worked out with the bankruptcy trustee, including the person’s past-due income tax debts. During this repayment period, the consumer must continue to file timely tax returns and pay all new income taxes that become due.
If the filer is not able to discharge his or her income tax debt, other options do exist. It may be helpful for the person to work directly with the IRS on a repayment plan to catch up on delinquent tax payments in installments. If the taxpayer cannot pay in installments, he or she may be able to work with the IRS through their “offer in compromise” program. Through this program, the consumer offers to pay the IRS less than what is owed in full. He or she must qualify first, and if the IRS accepts the application, the remaining balance will be forgiven. However, the consumer cannot apply for the “offer in compromise” program if he or she has already filed for bankruptcy.
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If you have questions on this topic or are in financial crisis and considering filing for bankruptcy, contact an experienced Miami bankruptcy attorney who can advise you of all of your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys’ help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade Garcia McMaken website at www.miamibankruptcy.com.