Business Tax Debts-the Myths and the Truth

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Bankruptcy can often help you deal effectively with business taxes. Here are three myths, and the truth exploding them.



Myth #1: Bankruptcy can’t write off taxes.




Truth: Some taxes can’t be written off. But many others CAN be through either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.” This depends on a number of rather complicated factors, including the following:



  • whether you filed a tax return for the tax year at issue
  • if so, when that tax return was filed
  • how long it’s been since that tax was first due
  • whether and when you asked to get a compromise of that tax
  • whether you tried to evade that tax in any way



So any particular tax you may owe has to be analyzed carefully with your attorney. But don’t start with the assumption that your taxes can’t be written off, or dealt with in some other favorable way.




Myth #2: Business taxes particularly can’t be written off.




Truth: Income that you pay yourself from your business is generally treated as your personal income. And particularly if your business is a sole proprietorship or a partnership, then your share of the business’ income (after expenses) flow through to you as personal income.




If your business is a corporation, then your salary or any other form of income you receive from the business is generally treated as personal income. The income tax on these various sources of “business” income can be written off just like any personal income tax from a conventional employer, depending on the same factors listed above.




If any of your taxes can’t be discharged in either a Chapter 7 or 13 case, Chapter 13 would nevertheless give you 3-to-5 years to pay those taxes, while under the protection of the IRS (and any applicable state tax authorities). Also, usually all interest and penalties which would otherwise have accumulated during this time would be waived, as long as you finished the case successfully.




Furthermore you can often pay less–and maybe even nothing—to your other creditors, allowing instead for your money to go to pay off the taxes. So at the completion of your case you would owe nothing in either taxes or any other debts.




Myth #3: Bankruptcy particularly does not help with unpaid employee withholding taxes that as an employer you were supposed to turn over to the IRS or state.




Truth: Although bankruptcy never discharges this category of taxes, in a Chapter 13 case these withholding taxes are basically treated just like other taxes that can’t be discharged, as discussed immediately above.




So you would have years to pay off those withholding taxes, all while being protected from the tax authorities, and usually with the interest and penalties not accruing.




Finally, usually you’d be allowed to pay these taxes while paying less or nothing to many of your other creditors. These are huge advantages.



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To Win the Chapter 13 Tax Prize, You Have to Finish the Race

A Chapter 13 case can be such a good tool for dealing with income tax debt, especially if you owe more than just a year or two of taxes. BUT, you lose those benefits if you don’t successfully finish paying off the Chapter 13 plan. So, go into it only if you have both a burning desire to make it all the way and a truly feasible plan with which to do so.

Chapter 13 often enables you to tame the tax debt beast in a very tidy package. Often you can discharge (write off) some of your tax debts, and pay substantially less on the taxes you must pay, by avoiding or reducing interest and penalties. And you can usually do all this while paying less per month and while being protected from all the nasty collection mechanisms in the tax authorities’ arsenal.

However, the truth that you need to keep in the front and center of your mind is that it’s all conditional: you don’t get the prize until the end of the race. And if you don’t get to the end of the race, no prize for you. The prize is the discharge—the discharge of the debts for the tax years that can be discharged, and of the interest and penalties that you would owe if you weren’t in a Chapter 13 case. You have to get through the whole race–pay your plan payments as scheduled and meet the other requirements of your plan (such as sending yearly tax returns to your trustee, and keeping current on any ongoing child or spousal support payments).

Now this doesn’t mean that your Chapter 13 case is inflexible. Depending on the situation, an experienced attorney will likely be able to build some flexibility into the terms of your original plan. Or if your circumstances change, your plan can usually be amended accordingly.

But look at it this way: the IRS and any other tax authorities are put on hold and have to accept the reductions and the write-offs while your Chapter 13 case is proceeding. But in the background they continue tracking what you would owe—including accrued interest and penalties–if you weren’t in a Chapter 13 case.  If at any time during your case you do not comply with the terms of your plan and, after appropriate warnings, your case gets dismissed (thrown out), leaving the tax authorities no longer be prevented from chasing you. At that time all those taxes, interest and penalties that your Chapter 13 case would have avoided would come roaring back at you.

This is something you want to avoid at all cost. How do you avoid getting your Chapter 13 dismissed?

  • Be fully engaged in the process of putting your Chapter 13 plan together at the beginning of your case, so that you understand its terms and truly believe that you can consistently comply with them.
  • Keep track of your progress throughout your case, both to stay motivated and to catch any potential problems early.
  • Inform your attorney if your financial circumstances change, whether they improve, so that you can account for increased disposable income, or if they deteriorate, so that you can reduce your required plan payments or take other appropriate action.
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The Benefits of a “Short Tax Year Election” in an Asset Chapter 7 Case

Your Chapter 7 trustee can use your unneeded assets to pay current-year income taxes if you split the calendar tax year into two: the pre-bankruptcy and post-bankruptcy “short years.”

I’m closing this series on taxes and bankruptcy with three blogs on some relatively sophisticated topics. The tools I discuss do not apply to most cases. But when they do, they can save you a lot of amount of money, and better meet your goals. This first one is a good example.

Let’s first set the scene. If you have substantial income tax liabilities, especially if they are spread over a number of years, Chapter 13 is often the best tool for dealing with them. But a Chapter 13 takes three to five years. Sometimes a Chapter 7 case accomplishes enough so that it’s the better option. If your taxes are old enough and you meet a series of conditions (see my last blog about this), a Chapter 7 case could discharge (legally write off) most or all of your tax debts. But even if Chapter 7 would leave you with a significant nondischargeable tax debt, it might still make more sense as long as you could anticipate a reliable and manageable arrangement for satisfying that one last debt outside of bankruptcy. Getting in and out of bankruptcy in a matter of months instead of up to five years may be worth a lot to you.

The short year election could help just enough to make Chapter 7 a feasible option, and therefore the preferred option. That’s  because it can enable more of your nondischargeable taxes to be paid by the Chapter 7 trustee, leaving you owing less taxes at the completion of your bankruptcy case.

As I said in the first sentence of this blog, the short year election allows you to split your tax year into two tax portions, each of which is treated as its own tax year. The first “short year” covers from January 1 of that year to the day immediately before the filing of your Chapter 7 case, and the other “short year” is the rest of the year—from the date of filing your case until December 31.  

How can this possibly help? Two ways.

1. It allows any taxes you may owe for the short year before filing the Chapter 7 case to be a “priority” debt in your case, so that it can be paid from assets collected by the Chapter 7 trustee. This turns debt that would have been treated as incurred after the filing of the case, and thus wholly your obligation, into one that may be paid in whole or in part by the trustee. This can reduce or eliminate the current year tax debt, leaving you with either less or none to pay after your bankruptcy case is over.

2. It allows you to apply any loss carry forwards or credit carry forwards from the prior tax year to the income earned during that same pre-bankruptcy short year. The loss carry forwards reduce the tax for that short year, thus reducing any your potential tax debt owed after your case is finished. The credit carry forwards increase the tax for that short year, but that gives the trustee the opportunity to pay it if there are estate assets with which to do so. Each in their own way can increase the possibility that you will have less or no taxes to pay after your case is over.

The context that this works best in is a closed business or some other situation where the debtors have non-exempt assets that they do not mind surrendering to the trustee in return for a discharge of most of or all of the debts. Imagine a spouse who had been trying to run a business, and then had to close it down. The other spouse has a relatively high salary or other income but stopped paying withholdings or quarterly estimated taxes at the beginning of the year because of the lack of income from the other spouse closing down the business. By three-fourths of the way through the year, a substantial amount of tax liability could accrue. They may not be able to simply wait until after the end of the year because of pressure from creditors. The short year election allows the tax debt accrued through three-fourths of the year to be potentially paid by the trustee by liquidating the no longer needed business assets. The trustee may also have funds from other sources, such as preferential payments from a creditor or two.

So, through the benefit of the short year election, in the right circumstances the trustee could pay thousands of dollars of your nondischargeable tax debt by liquidating assets that you no longer need, instead of having this same money just going to your other creditors. And to the extent that the trustee would be getting some of that money through forced reimbursement of creditor’s preference payments, some of your taxes would be indirectly paid by those creditors. Not often that you can get somebody else to pay your taxes.

As I said at the beginning, the short year election is a tool which applies only limited cases, but when it does it can be extremely helpful.

 

NOTE: This election is available ONLY in asset Chapter 7 cases–not Chapter 13s or no-asset Chapter 7s.

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Writing Off Income Taxes Forever through Bankruptcy

What income taxes can a Chapter 7 bankruptcy completely write off?

My last blog ended saying how Chapter 13 lets you pay off certain income taxes much more conveniently because you’re protected from the tax collector and can usually avoid paying substantial amounts of interest and penalties. But that’s for taxes you can’t write off. What exactly does it take to write off a tax completely?

It takes meeting four main conditions.

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 main conditions for writing off income taxes.  

1. Have 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. Have two years passed since the applicable tax return was actually filed?

It does not matter how ancient the tax 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. Have 240 days passed since 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 whether any or all of your income tax debts can be written off in a bankruptcy. And in some cases applying these four conditions will give you the 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 an 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.

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Three Big Ways Bankruptcy Helps with Income Taxes

Bankruptcy CAN 1) legally write off some income taxes; 2) stop IRS wage garnishments, bank account levies, and tax liens; and 3) enable a faster payoff of the taxes you must pay, by avoiding most ongoing interest and penalties.

In the last two blogs I explained what happens to tax refunds in Chapter 7 and 13. But what if instead you owe income taxes? The treatment of tax debts in bankruptcy is a complicated subject, but here today I’m covering the most basic and important powers of bankruptcy over taxes.

1) The ability to “discharge” (write-off) income taxes:

I’m not going into the detailed rules here, but let me clear up any possible confusion: income taxes can be discharged if they meet some very specific conditions. Among those conditions:

  • the age of the particular tax
  • whether and when the tax return was filed
  • whether there was any effort to enter into an “offer in compromise”
  • whether there is evidence of tax evasion

Generally the older the tax, the more likely it will be discharged, although some of the conditions are not time-based.  If you owe more than one year of income taxes, then each year of tax debt is analyzed separately. In fact portions of each tax year’s debt—tax, interest, and penalties—are treated differently in many situations. To be clear, taxes can be discharged under either Chapter 7 or Chapter 13. So determining which of these two options is better requires carefully comparing how each treats your tax debts, as well as all your other debts.

2) The “automatic stay” applies to the IRS, and to the state and local taxing authorities:

Changes in the law tend to cause confusion, to get blown out of proportion. The last major overhaul of the bankruptcy laws by Congress in 2005 allowed the IRS and other tax agencies to do certain very limited things in spite of the taxpayer having filed a bankruptcy. These limited exceptions to the automatic stay include:

  • conducting (or continuing) a tax audit (but not taking any action outside the bankruptcy court to collect the tax resulting from the audit)
  • issuing a notice of deficiency
  • assessing the taxes
  • issuing a “notice and demand” (although again without taking any collection action)

Otherwise, just like all other creditors, the IRS and its state and local cousins cannot pursue collection of any liabilities while your bankruptcy case is pending, except in the unusual event that the bankruptcy court gives special permission to do so.

3. As for taxes that cannot be discharged, Chapter 13 usually provides a way to avoid most ongoing interest and penalties, reducing the total amount of taxes to pay:

Back taxes often take a long time to pay off because interest and penalties keep accruing while you are making the payments. Especially if your payments are relatively small, the additional interest and penalties can greatly increase the total you end up paying. But in a Chapter 13 case, the penalties stop accruing as soon as soon as your case is filed. Even the earlier penalties are treated like normal debt and so are often paid little or not at all. And interest does not get added unless that tax debt is covered by a recorded tax lien.  In combination these benefits can save lots of money. This lack or reduction in accruing interest and penalties also allows you to pay other important debts before paying the taxes—such as vehicles or home mortgage arrears. This allows you to better protect those valuable possessions by paying their debts faster.

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Chapter 13 Conquers Both Older and Newer Income Taxes

If you owe a number of years of income tax debt, Chapter 13 allows you to favor those taxes that have to be favored, while dumping the taxes that can be dumped.

In my last blog I gave an example showing how Chapter 13 can be an extremely good way to handle income tax debts particularly when you owe multiple years of taxes. In that hypothetical case, without a bankruptcy a couple would have had to pay about $30,000 to the IRS for back taxes, plus about another $45,000 in medical bills and credit cards, a total of $75,000. And paying this huge sum of money on their income would have taken them many, many years of pressure and uncertainty. In huge contrast, in a Chapter 13 case this same couple would only need to pay about $17,500, less than 1/4th the amount. And they would be allowed to do so through pre-arranged affordable monthly payments, for three years, all the while not having to worry about aggressive actions by any of their creditors, including the IRS.

How does Chapter 13 pull this off?

1) Tax debts that are old enough are lumped in with the lowest priority “general unsecured” creditors—like medical bills and credit cards—and so in many cases do not need to be paid anything unless there is enough “disposable income” to do so. This means that often those taxes are paid either nothing—as in the example—or  only a few pennies on the dollar.

2) The more recent “priority” taxes DO have to be paid in full in a Chapter 13 case, along with interest accrued until the filing of the case, but a) penalties—which can be a large part of the debt—are treated like “general unsecured” debts rather than “priority” ones, and 2) usually interest or penalties stop when the Chapter 13 is filed. These can significantly reduce the amount of tax that has to be paid.

3) “Priority” taxes are paid in a Chapter 13 case before and instead of “general unsecured” debts. This often means that having these taxes to pay simply reduces the amount of money which would otherwise have gone to those “general unsecured” creditors. So sometimes, amazingly, having tax debt does not increase the amount paid in a Chapter 13 case. In our example, the couple paid about $500 per month for three years, which is the same amount they would have paid even if they did not owe a dime to the IRS! They met their obligations under Chapter 13 by paying the IRS instead of their other creditors.

4) The bankruptcy law that stops creditors from trying to collect their debts while a bankruptcy case is active—the “automatic stay”—is just as binding on the IRS as on any other creditor. The IRS can continue to do some very limited and sensible things like demand the filing of a tax return or conduct an audit, but it can’t use the aggressive collection tools that the law otherwise grants to it. Gaining relief from collection pressure from the IRS AND all the rest of the creditors is one of the biggest benefits of Chapter 13.

I confess that I put this example together in a way that would showcase the advantages of Chapter 13 in dealing with income tax debts. If the facts were different, the advantages could easily be less. If, for instance, more of the taxes were “priority” debts that had to be paid, the debtors would have to pay more, either through larger monthly payments or for a longer period of time. There are definitely situations where it is a close call choosing between Chapter 7 or Chapter 13, or possibly even not filing bankruptcy at all but doing an offer in compromise with the IRS. To decide what is best for you, you need the independent advice of an experienced bankruptcy attorney, who is ethically and legally bound to look out for your best interests. Regardless whether your tax debts and other circumstances point strongly in one direction or it’s a closer call, you need a professional qualified both to help you make an informed decision and then to execute on it.  

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Chapter 13 Tames Your Income Tax Monster

A “straight” Chapter 7 can write off some income taxes. But if you owe recent taxes, or multiple years of taxes, Chapter 13 is usually a much better way to go. It often provides tremendous advantages over both Chapter 7 and dealing with the IRS on your own.

I’ll illustrate this with an example, and then explain it in my next blog.

Let’s say a husband and wife owe $35,000 in a combination of medical bills and credit cards, requiring monthly payments of $800. After the husband lost his long-time job back in 2006, he followed his dream of starting a business, which was starting to make progress when it got hammered in the Great Recession. He closed it in 2010 and found a reliable job a number of months later, although one where he earns 30% less than he did at the one lost years earlier. His business had generated some income, but barely enough for the couple to meet their bare essentials. So there was no money to pay the quarterly estimated taxes, and they had no money to pay the amount due when they filed their joint tax returns for 2006, 2007, 2008, 2009 and 2010. They expect to come out even for the 2011 tax year because of tax withholdings from their wages. To try to simplify the facts, assume they owe the IRS $4,000 in taxes, $750 in penalties, and $250 in interest for each of those five years. So their total IRS debt for those years is $25,000—including $20,000 in the original taxes, $3,750 in penalties, and $1,250 in interest. The wife has had consistent employment throughout this time, with pay raises only enough to keep up with inflation. They filed each of the tax returns in mid-April when they were due, and have been making modest payments when they have been able to, but those have not even been keeping up with the penalties and interest. Assume they have no secured debts—no mortgage or vehicle loans. They can realistically afford to pay about $500 a month to all of their creditors, not enough to pay their regular creditors much less the IRS.

Outside of bankruptcy, the IRS would likely require payment in full of the entire tax obligation, with interest and sometimes penalties continuing to accrue until everything was paid in full. Their payments would be imposed without regard to the other debts they owe. And if the couple failed to make their payments, the IRS would likely try to collect through garnishments and tax liens. Depending how long repayment would take, the couple could easily end up paying $30,000 or more with additional interest and penalties. This would be in addition to their $35,000 medical and credit card debts, which could easily increase to $45,000 or more, especially if these other debts went to collections or lawsuits. That’s likely because the couple would be paying all available money to the IRS. So likely the couple would eventually end up paying at least $75,000 to their creditors.  

In a Chapter 13 case, the 2006 and 2007 taxes, interest and penalties would very likely be paid nothing and discharged at the end of the case. So would the penalties for 2008, 2009, and 2010. That takes care of $11,500 of the $25,000 present tax debt. The remaining $13,500 of taxes and interest for 2008, 2009, and 2010 would have to be paid as a “priority” debt, although without any additional interest or penalties once the Chapter 13 case is filed. Adding in some “administrative expenses” (the Chapter 13 trustee and our attorney fees), and assuming that their income qualified them for a three-year Chapter 13 plan, this couple would likely be allowed to pay about $500 per month to ALL of their creditors—credit cards and medical, AND the IRS. Then after three years, they’d be done. The “priority” portion of the IRS debt would have been paid in full, but the older IRS debt and all the penalties would be discharged likely without any payment. So would the credit card and medical debts. After the three years, the couple would have paid a total of around $17,500 (including the “administrative expenses”), instead of about $75,000 without the Chapter 13. They’d be done instead of barely starting to pay their mountain of debt. And they would have not spent the last three years worrying about IRS garnishments and tax liens, lawsuits and harassing phone calls, and the constant lack of money for necessities.

As I said, in my next blog I’ll explain how all this works.

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Four Hoops to Jump Through to Write Off Income Taxes in Bankruptcy

The conditions you have to meet to write off an income tax debt actually make sense. And understanding those conditions is a lot easier if you understand the sense behind them.

In my last blog I introduced the four conditions for discharging taxes in a Chapter 7 “straight bankruptcy,” and said I’d explain them in this blog today.

This is made easier by the fact that there is a single principle behind all four of these conditions: bankruptcy law believes that taxpayers who pretty much follow the tax laws should be able to write off their tax debts just like the rest of their other debts, after first giving the IRS (or other tax authority) a sensible amount of time to collect the taxes.

How long is this sensible amount of time? How much of an opportunity do the tax authorities have to collect before you can discharge the tax debt? Each of the four conditions measures this amount of time differently, based on 1) when the tax return for the particular income tax was due, 2) when the tax return was actually filed, 3) when the tax was “assessed,” and 4) whether the tax return that was filed was honest and therefore reflected the right amount of tax debt when it was filed. You must meet all four of these conditions, all four of these measures of time.

Taking them one at a time:

1) Three years since tax return due: Every income tax debt has a fixed point in time when its return had to be filed. That date is extended by a certain number of months if you asked for an extension, but it’s still a fixed point in time, one that can be easily ascertained. So this first condition gives the tax authorities three years to collect, three years from a fixed point not affected by your actions (the timing of filing the return) or their actions (audits, legal disputes).

2) Two years since tax return actually filed: In contrast, this is a time period triggered by your own action. Notice above when I stated the overall principle at work here, I said you must “pretty much” follow the tax law. Thus you can file a tax return late and still be able to discharge the debt if at least two years has passed since you filed the return.

3) 240 days since assessment: Assessment is the tax authority’s formal determination of your tax liability, usually by its review and acceptance of your tax return. Normally an income tax is assessed within a few weeks that it is received, so the 240 days since assessment usually passes way before the above three-year or two-year time periods. But the law has to account for the less common situations when assessment is delayed. So, when a tax is subject to a lengthy audit or litigation, or an “offer-in-compromise” (a taxpayer’s formal offer to settle), and the three-year and two-year periods have passed, the tax authority still has 240 days after assessment to chase that tax debt.

4) Fraudulent tax returns and tax evasion: This last condition essentially says that none of the above time periods are triggered at all if you are intentionally dishonest on your tax return or try to avoid paying the tax in some other way. If you are cheating on your taxes then the tax authority has no opportunity to collect the debt, so you cannot discharge the debt, no matter how old the tax is.

If your tax debt can jump through these four hoops, you should be able to discharge that tax in a Chapter 7 bankruptcy.

But what if you owe taxes which do not meet these four conditions? What if some of your taxes do but others do not? Or what if the IRS has recorded a tax lien? Or if a lot of the taxes came from operating a business, or are not income taxes but some other kind? I’ll tell you about these situations in my next blogs.

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Writing Off Income Taxes with a “Straight Bankruptcy”

You don’t always need to file a Chapter 13 case—with its 3-to-5-year payment plan–to deal with income tax debts. Thinking that you do is a myth, alongside the broader myth that “you can’t write off taxes in a bankruptcy.” Both have a kernel of truth, which is why they persist. It’s true: some taxes cannot be discharged (legally written off) in bankruptcy. But some can. And it’s true: Chapter 13 is often an excellent way to solve tax problems. But that does not necessarily mean it is the best for you. Instead Chapter 7 might be.

Chapter 13 tends to be the better tool if you owe a string of income tax debts including relatively recent ones. Why? Because in this situation Chapter 13 gives you the best of both worlds. First, if you owe recent income taxes which cannot be discharged, you get lots of advantages under Chapter 13, including paying less by avoiding most penalties and interest. That can be a huge savings, especially if you can afford only relatively small payments. Second, if you have older back taxes, these are also wrapped into the Chapter 13 plan, often without you paying any more into your plan, then they are discharged at the end of your case.

But you DON’T NEED the best of both worlds if all or most of your income tax debts are dischargeable. Then Chapter 7, the straightforward “straight” bankruptcy is enough.

So, WHAT ARE the conditions for a specific income tax debt to be discharged in Chapter 7? How are you going to know if Chapter 7 will discharge all or most of your taxes so that it is the right option for you?

Some of the conditions for discharge of taxes are quite straightforward. Some are more complicated. And as you’ll see, some are even purposely vague. So unfortunately it’s not as simple as plugging a particular tax debt into a clear formula to see if it is dischargeable. Determining whether a particular tax debt will be discharged requires the careful judgment of an experienced attorney.

I’ll just list these conditions for discharging income taxes here, and then explain them in my next blog. Don’t be surprised if they sound confusing in this list. It’s true: anything having to do with taxes tends to be complicated!

To discharge an income tax debt in a Chapter 7 bankruptcy case, it must meet these conditions:

1) Three years since tax return due: The applicable tax return must have been due more than three years before you file your Chapter 7 case. And if you requested any extensions for filing the applicable tax returns, you have to add that extra time to this three-year period.

2) Two years since tax return actually filed: Regardless when the tax return was due, you must have filed at least two years before your bankruptcy is filed in court.

3) 240 days since assessment: The taxing authority must have assessed the tax more than 240 days before the bankruptcy filing.

4) Fraudulent tax returns and tax evasion: You cannot have filed a “fraudulent return” or “willfully attempted in any manner to evade or defeat such tax.”

You can see that these are begging for some clarification. For that please come back to read my next blog. Or else call to set up a consultation with me. If you have substantial tax debts, you should definitely get some thorough personal advice. Know your options so you can make an informed choice, about bankruptcy and otherwise.

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Taxes and Bankruptcy–Debunking a Hardy Myth

No wonder people think “bankruptcy can’t help me with my tax debt.” Even attorneys sometimes perpetuate the myth.

A few days ago I saw a video of a bankruptcy attorney being interviewed in what amounted to be an infomercial. He was asked by the interviewer whether there were some debts that can’t be “touched” in a bankruptcy:

Attorney: “Absolutely. Things like child support, alimony, uh, tax debts, student loans. Those generally aren’t dischargeable.”

Interviewer:  “So the government’s gonna help you eliminate some of the debt in a bankruptcy. But not the debt to them.”

Attorney: “Not theirs, of course!”

Lumping tax debts in with child support and alimony—which indeed cannot be legally written off, or discharged—is just plain wrong. For him to say that tax debts “generally aren’t dischargeable” while including it with other debts that are never dischargeable, or in the case of student loans very rarely dischargeable, is at best very confusing.

And no question, the merger of taxes and bankruptcy can be confusing, because each of these are rather complicated areas of law. Misinformation doesn’t help.

In my next few blogs, you’ll get some solid answers about what taxes can be discharged and what can’t. 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, which I will explain carefully.

But right now maybe the most important thing to understand is that even as to the particular taxes that may not be discharged, a bankruptcy still usually provides huge advantages in dealing with those taxes. So besides the possibility that you will be able to discharge some or all of your taxes, bankruptcy can also:

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

2. Stop them from gaining greater leverage against you, through tax liens and piling on greater penalties and interest.

3. Avoid forcing you to pay them monthly payments based on totally unreasonable policies (such as giving no consideration to most of your other legal obligations), all the while penalties and interest continue to accrue.

Overall, bankruptcy gives you leverage against the IRS, or state or local taxing authority that you cannot 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.

I’ll explain all this in my next blogs. Call me in the meantime if you can’t wait, or you know you shouldn’t wait. There is no kind of debt that needs more careful personal attention and advice than tax debts.

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