As the looming tax deadline approaches and the numbers tally up many Americans are pondering how they will pay by the April 18th deadline. For some, there is even more to think about… How to pay off back taxes with the accumulating penalties and interest? You have no doubt heard the commercials boasting of reversing back taxes or eliminating tax debt. If you have been considering bankruptcy because of back due taxes and other mounting debt there may be options to discharge your tax debt in Chapter 13 bankruptcy or Chapter 7 bankruptcy but they are not quite as easy as described in all those commercials.
There are a number of factors that decide if a tax debt is dischargeable:
Due Date (When the taxes were due and assessed.)
Has Lien Been Filed
Before meeting with a qualified bankruptcy attorney you should obtain past tax information. Past tax information for any year can be obtained by submitting IRS Form 4506T and the correlating fee. Or you can obtain a Tax Return Transcript from the IRS website for the prior three years for free.
Chapter 13 or Chapter 7 Bankruptcy Review
The bankruptcy attorney will review all your information to evaluate if bankruptcy is a valid option and which type of bankruptcy is right for your situation. In connection with your past tax debts, the attorney will look at what your priority taxes are and use the Three-Year Rule or Two-Year Rule as well as the 240-Day Rule to assess if the tax debt is dischargeable.
The Three-Year Rule test requires that the tax return must have been due at least three years before the date you plan to file for bankruptcy. Further, the three year rules begins at the end of any extensions you were granted for that year’s taxes. The Two-Year Rule test requires that the tax return must have been filed at least two years before the date you file for bankruptcy. Lastly, the 240-Day Rule test requires that the taxes must have been assessed a minimum of 240 days before the bankruptcy filing date. The 240 days begin after any extensions of time due to negotiations or settlement talks.
Bankruptcy May Not Be the Answer
There are several instances where tax debt cannot be discharged, however, for some of these instances it varies court to court. Most bankruptcy courts will not discharge tax debt if you failed to file a tax return and the IRS filed a substitute return on your behalf. If a tax return was filed fraudulently or the taxpayer is guilty of evading the various tax laws, the debts can’t be discharged.
The most common reason tax debts can’t be discharged is due to tax liens. If the IRS or other state tax authority files a lien against your property before you file for bankruptcy the tax debt associated with the lien will not be discharged. The tax lien gives the lien holder an interest in the property the tax lien is attached to, and the IRS has the authority to sell the property to pay the debt. That being said, if you file for bankruptcy before the lien takes effect, that tax debt may be dischargeable.
Because timing is of the essence when hoping to discharge tax debt, it is vital to seek the assistance of a qualified bankruptcy attorney. This is for two reasons, one the bankruptcy attorney will be able to evaluate and maximize the effectiveness of your bankruptcy filing. And two, seeking professional assistance will reduce the likelihood of making pricey and permanent errors.