Can you file bankruptcy on taxes owed to the IRS?
What is income tax debt?
Tax debt is the amount of money that must be paid to the IRS after the tax return is filed initially. If you only paid a portion of your taxes before the due date, it doesn’t matter. The remaining balance will remain a part of your tax debts. A common misconception is that property taxes and trust fund taxes are included in income tax debt.
Traditional ways of clearing tax debts
Unpaid tax penalties are always in effect. The standard late payment penalty imposed by the IRS is 0.5% of the total tax due. If you owe taxes to the IRS, they can tack on a maximum 25% penalty. The Internal Revenue Service (IRS) adds interest to the total amount owed each month and any penalties for past due taxes. Each month, penalties and interest added to an outstanding tax bill can quickly add to a sizable sum.
The Internal Revenue Service (IRS) will never reduce or waive interest on the tax debt, even though they may reduce fines for tax arrears if they determine the reason for nonpayment of taxes was justifiable.
A tax lien, the outcome of an unpaid tax bill, is used to damage a person’s credit severely. To counteract this, in 2017, the three major credit reporting agencies agreed to stop using tax liens in credit scores. As a result, tax arrears no longer harm a person’s credit rating.
To reduce your tax penalty, you must show the Internal Revenue Service that you have “reasonable cause” for not paying. The IRS often accepts legitimate explanations like theft, natural disasters, divorce, death in the family, etc. The IRS may reduce or even waive the penalty for late tax payment if you can show that your failure to comply was due to circumstances beyond your control and resulted in a dire financial situation.
Efforts by the IRS to recover tax debt
If the IRS establishes that you owe taxes, they will file a replacement tax return to select the amount of those taxes. The IRS will send you a notice with the estimated amount of taxes you owe and information on how to make a payment.
Remember that the IRS will not provide information on how to reduce your tax burden, get rid of penalties, or any other method for paying down your tax obligations. Furthermore, the IRS does not factor in any credits or deductions you may be eligible for when determining your tax liability. It would be best if you got your case ready, ideally with the help of a qualified tax firm, before responding to the IRS letter.
You can still submit your tax return with the deductions you qualify for, even after the IRS has filed a replacement tax return. Additionally, you may be qualified for tax debt relief via penalty abatement, tax debt reduction schemes, and other similar programs.
The IRS sends letters demanding payment of tax debt and seizing and selling the taxpayer’s property and assets. The IRS can take taxpayers’ wages and confiscate their assets to pay for the income tax debt owed. The Internal Revenue Service (IRS) may use a federal tax lien to alert third-party creditors of its claim on a taxpayer’s property and assets. Since federal liens are recorded publicly, they can significantly damage a taxpayer’s credit score.
Is it feasible to declare tax-related bankruptcy?
Yes. It is conceivable that filing for chapter 7 or chapter 13 bankruptcy can assist you in becoming debt-free. In reality, filing for chapter 7 bankruptcy may provide the discharge of both federal and state tax obligations. These five variables will decide your future eligibility for tax relief.
Deadlines for filing Bankruptcy - Can bankruptcy clear tax debt?
So will your filing for chapter 7 or chapter 13 bankruptcy clear tax debt? Well, If you owe the IRS income taxes and cannot pay them, bankruptcy may be a possibility for relieving your debt. If a payment plan and an offer in compromise are out of reach for you, the Internal Revenue Service demands two main terms for filing bankruptcy.
Firstly, you must file all applicable tax returns for tax periods ending fewer than four years from the date of your bankruptcy filing. Secondly, during the period you are applying for bankruptcy, you must continue to file all required tax returns or request an extension. If you fail to submit tax returns and/or pay current taxes, your chapter 7 bankruptcy case may be dismissed.
If you’re an individual (sole proprietors included) you fall under chapter 13 debt consolidation, also known as a personal bankruptcy. Chapter 13 bankruptcy is optimal for individuals trying to keep their property and catch up on their mortgage payments. In addition, chapter 13 bankruptcy allows for car loans, and other debt payments to be caught up on.
Bankruptcy and Tax Debt Basics
When you apply for bankruptcy protection under federal law, it will often stop bill collectors from harassing you and release you from a major percentage of your financial commitments. However, tax debt is treated differently than other kinds of debt. However, filing for bankruptcy does not necessarily secure dischargeable tax on most taxes.
Taxes are frequently considered a “priority debt that cannot be discharged” in the framework of the bankruptcy procedure. As a result, filing for bankruptcy will not eliminate tax debt and repayment of the obligation takes precedence over claims from other creditors. In certain instances, a tax liability may be considered a “dischargeable debt,” meaning that it can be eliminated by filing for bankruptcy.
Is it still feasible for me to file for bankruptcy if I haven't paid my taxes for several years?
Even if you have not paid your taxes for a number of years, you can still file for bankruptcy protection. No matter how long ago the tax debt was incurred, it is possible to include it in a bankruptcy file. If the tax debt expiration date is met and you meet the other conditions, you may be eligible to discharge it as part of the bankruptcy procedure. You must have already filed all of your tax returns in order to submit a bankruptcy petition.
How do I notify the Internal Revenue Service of my bankruptcy filing?
If you listed the Internal Revenue Service as one of your creditors in your bankruptcy petition, the United States Bankruptcy Courts will notify the IRS electronically, or through other automated technology of your case within a few of days after the petition date.
Call 800-973-0424 and offer your bankruptcy case number to the Centralized Insolvency Operation if you are uncertain as to whether or not we have received notification. To call the IRS you might want to use pre-recorded messages, or have a lawyer talk for you as a representative.
What about my expected tax refund?
This question comes up quite a bit. Consult with your attorney if you feel you are entitled to a substantial refund. It may be prudent to defer paying your taxes until after you have received your refund for the prior tax year. Technically, when a consumer files for bankruptcy, all of their non-exempt property is transferred to the trustee for liquidation. This also applies to tax refunds. If the policies where you reside differ from those where I dwell, you may be able to use the wildcard exemption to avoid completing the tax return.
What does this entail for me specifically?
If you have a tax burden and have filed as a bankruptcy trustee, alone or with your spouse, the Internal Revenue Service (IRS) may send you several letters regarding your bankruptcy and how it relates to your tax due. I request that you read each letter carefully and then respond as necessary. If you have any questions, please do not hesitate to contact one of our qualified tax consultants for a complimentary consultation.
The Conditions for the Waiver of Tax Obligation
The first requirement for dischargeability of income tax debt is that it must specifically be income tax debts. This would include federal and state income taxes that have not been paid, but not payroll taxes, such as those for Social Security and Medicare, that have not been withheld.
The second requirement is that the tax liability must not be too recent; normally, it must be less than three years old. For greater clarity, the original tax return’s due date must have been at least three years previous to the filing date of the bankruptcy petition.
At least two years prior to filing for bankruptcy, you must have filed an accurate tax return for the tax debt being discharged. In addition, the tax return had to be submitted by the deadline. If you requested an extension and were granted one, and then file your return by the date given for the extension, it will be considered timely. If the return was filed after the extended deadline, it is probable that it will not be considered as valid, and the tax debt will not be dischargeable.
At least 240 days previous to the bankruptcy petition, the Internal Revenue Service (IRS) must have assessed the tax debts, registering them in its records. In addition to the restrictions regulating the age of the tax debt and the timeliness of the repayment, this criterion must be met.
If the Internal Revenue Service (IRS) assessed the obligation and then delayed collection due to a past bankruptcy filing or other reason, the standard 240-day time period might be prolonged, making it more challenging to discharge the tax debt. Your time limit for challenging could be extended by the IRS in case of suspended collection activity due to an installment agreement, offer in compromise, or a previous bankruptcy filing.
Be warned that filing for bankruptcy would not protect you if you attempted to avoid paying taxes or filed a fake tax return. Your tax returns must have been presented in an honest manner. Also, be aware that the reduction of tax debt through bankruptcy may be controlled by varying criteria in different court jurisdictions. We’ve covered the essentials, but bear in mind that local regulations may impose extra requirements.
In addition, keep in mind that you cannot discharge payroll taxes, employment taxes, trust funds faxes, sales tax, and any penalties for non-dischargeable taxes.
Ensure that the taxing authority, which is often the Internal Revenue Service (IRS), has not put a federal tax lien on your property. Filing for bankruptcy will not erase a lien (like property taxes) that has already been established. As this is one of the most commonly encountered obstacles on the way to receiving tax relief through bankruptcy, it merits more examination and a description.
Tax Debt Alternatives to Bankruptcy
There are alternatives to declaring bankruptcy for tax concerns. The Internal Revenue Service (IRS) could be willing to negotiate with a taxpayer who owes past taxes and proposes an installment payment plan. If your tax load is your principal cause of financial stress, establishing a payment plan with the Internal Revenue Service (IRS) might be equally as effective and save you money on legal expenses.
If you cannot settle your tax debt through an installment plan, you may be eligible for the Internal Revenue Service’s “offer in compromise” program (IRS). The procedure is as follows: You agree to pay taxes to the IRS a sum that is less than the total amount owing, and if you satisfy the conditions, the IRS will waive the difference.
Be aware, however, that after your bankruptcy filing date, you will no longer be allowed to make any form of compromise offer for either that debt or other tax debts you have filed bankruptcy for
The Influence of IRS Tax Liens on bankruptcy tax debt
If the IRS has already filed a tax lien against you, the chance of eliminating tax debt gets considerably smaller. A tax lien converts the tax debt into a secured obligation that must be fulfilled regardless of the chapter of bankruptcy you file under, even if the tax bill is old and would otherwise be dischargeable. This is true even if the tax obligation is old and would have been dischargeable otherwise.
However, from that point, it might be easier to discharge tax debt or find debt relief by arranging monthly payments, considering your total monthly income and monthly expenses.
Getting professional help for chapter 7 bankruptcy
In any way, a bankruptcy specialist might be able to help you file for bankruptcy or give you a professional tax assessment. At a professional law firm, attorneys evaluate your situation, helping you find the estimated value of getting a bankruptcy lawyer and help you find the optimal outcome for your IRS tax debt.
Moreover, you can share sensitive or confidential information with your bankruptcy attorney. Attorney-client relationship terms are beneficial if you are guilty or charged with tax evasion. There are significant fraud penalties for a fraudulent tax return. If a debtor willfully attempted to file a fraudulent return or evade taxes they are advised to contact any of our bankruptcy lawyers directly.
Liens & Bankruptcy
There is an important contrast between tax debt and liens. Simply put, tax debt is money owed to the Internal Revenue Service (IRS). A tax lien is a judgment that is secured against your property to satisfy a tax debt owed to the state. Either the state or the federal government may file a tax lien. Even if you are eligible for Chapter 7 bankruptcy and meet all of the aforementioned qualifications you might still have a lien. When you file bankruptcy, it will not eliminate liens from the past.
If the IRS filed your bankruptcy, your legal obligation to pay creditors your debt will be discharged, but it will not completely disappear. The Internal Revenue Service will no longer have access to your income or bank account.
However, if a tax lien was issued before your chapter 7 bankruptcy filing, the lien will remain connected to the property even after you have been discharged. If you desire to sell your property in the future, you will be forced first to pay off the property’s debt.
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Do you have any more questions regarding taxes or the bankruptcy procedure? Please contact us today. We would be happy to conduct a no-cost consultation to assist you in gaining a better understanding of your options.