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Resolve Your Income and Business Taxes through Bankruptcy While Continuing to Operate Your Business

Do you believe that your small business could survive, and even thrive, if you could just get better payment terms on your overdue taxes?

 

The Near-Universal Debt Challenge

If you are the owner of a struggling business, you likely have income tax problems.

When you are barely scraping by, needing every dollar to pay the absolutely necessary expenses to operate your business, it’s not surprising that there just isn’t enough money to pay the estimated personal income tax payments when they come due every calendar quarter. And so it’s also not surprising if those quarters of unpaid or underpaid taxes start piling up, and before you know it you are behind a year or two or more of income taxes.

The situation can be even worse if you have an employee or two. When you have some absolutely crucial business or personal expense to pay, it’s sometimes just too tempting to use the employee payroll tax withholding money to pay that expense instead of turning the money over to the IRS or the state.

Then your business improves so that you can begin to pay your ongoing estimated and withholding taxes. But you still don’t have the money to simultaneously pay both your current and past tax obligations. Plus penalties and interest keep accruing.

Catching up once you fall behind on your taxes is simply very hard to do when you’re trying to run a business.

The Fear Factor

 You likely already know that the IRS and the state taxing agencies have extraordinary collection powers that they can bring to bear against you, and against your business and personal assets. Besides the usual tools that they can use against individuals, they can do worse to you and your business. They can garnish your receivables—so that your customers find out that you are having serious tax problems. They can levy on—seize—your business equipment and inventory. They can “tap your till”—come onto your premises and seize whatever cash you have on hand.

It’s not that the feds and/or the state will take always such aggressive collection actions against every business or business owner who owes taxes. But they DO tend to be pushier with business-related tax debts, especially if they include tax withholdings.

The larger point is that if you own a business and are behind on taxes, the power of the taxing authorities to cripple your business legitimately makes resolving your back taxes your most urgent problem.

The Chapter 13 Solution

A Chapter 13 “adjustment of debts” helps resolve your tax debts, and so enables your business to survive. It does that by significantly reducing both your business and personal monthly debt obligations, and by sometimes reducing the tax debts themselves and/or giving you much more flexible payment terms.

Specifically as to the past due taxes:

  • some of the taxes and/or penalties may be permanently written off (“discharged”) altogether;
  • payments on the remaining tax debts may be stretched out over a longer period than the taxing authorities would otherwise allow, thereby reducing the amount you would need to pay each month; and
  • ongoing interest and penalties usually stop accruing, so that the payments you make pay the tax debts off more quickly.

Conclusion

Filing a Chapter 13 case almost always gives you immediate month-to-month relief, easing your business and personal cash flow. That’s because the IRS and state are immediately prohibited from collecting against you, including using the strong-arm powers that they have to force payment.

And Chapter 13 gives you long-term relief by almost always reducing the total you have to pay, and giving you time and flexibility in paying it.

So, Chapter 13 is often the best way to get you and your business tax-debt free.

 

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The Four Conditions for Writing Off Income Taxes in Bankruptcy

The conditions for writing off income tax debts actually make sense.

 

The last blog introduced the four conditions for discharging (legally writing off) taxes in bankruptcy. Here’s a fuller explanation of them.

The Core Principle Behind the Four Conditions

There is a simple principle behind all four of these conditions: under bankruptcy law taxpayers should be able to write off their tax debts just like the rest of their debts, AFTER the IRS (or other tax authority) has a reasonable length of time to try to collect those taxes.

What’s a reasonable length of time in the eyes of the law? How much of an opportunity do the tax authorities have to collect before you can discharge the tax debt?

The four conditions each measure this amount of time differently, based on the following:

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.

To discharge an income tax debt, it must meet all four of these conditions.

Here they are in order:

1) Three Years Since Tax Return Due:

All income taxes have a fixed due date for its return to be filed. That date may be delayed by a certain number of months if you asked for an extension, but it’s still a specific point in time. This first condition gives the tax authorities three years from the tax return filing date, or from the extended filing date if you asked for an extension. Note that this is fixed date, not affected by when you actually filed the return nor by what the tax authority did once it received the tax return.

2) Two Years Since Tax Return Actually Filed:

This second condition is different than the first because it is a time period triggered by your own action, your filing of the tax return.

Note that you can file a tax return late and still be able to discharge the debt if at least two years have passed since you filed the return. (Caution: there are some parts of the country where some court opinions have questioned this—be sure to talk with your attorney about the law in your jurisdiction.)

3) 240 Days Since Assessment:

This third condition can be a bit confusing. It very seldom comes into play—most tax debts meet this condition without any problem.

Assessment is the tax authority’s formal determination of your tax liability. It usually happens in a straightforward way, when it receives, processes, and accepts your tax return.

Most of the time an income tax is assessed within a few days or weeks that it is received. So the period of time of 240 days after assessment usually passes long before the above three-years-since-the-return-is-due or two-year-since-tax-return-filed time periods. But the law has to account for the less common situations when the assessment is delayed. These situations can involve a lengthy audit, or litigation, or an “offer-in-compromise” (a taxpayer’s formal offer to settle). In these kinds of situations the three-year and two-year periods may have passed before the official assessment of the tax, and so the tax authority still has 240 days once assessment is made to pursue that tax debt.

4) Fraudulent tax returns and tax evasion:

This last condition effectively means that the above time periods are not triggered at all if you are intentionally dishonest on your tax return or try to avoid paying the tax in some other way. In those situations the tax authority has no opportunity even to begin collecting the tax. So, if you don’t meet this condition, you cannot discharge the tax no matter how old it is.

If your tax debt meets these four hoops, you should be able to discharge that tax in either a Chapter 7 or Chapter 13 bankruptcy.

If You Don’t Meet These Conditions

But what if you owe taxes which do not meet these four conditions, and so can’t be discharged? What if some of your taxes can be discharged by meeting these conditions but some of them don’t? Or what if the IRS or the state tax authority has recorded a tax lien? What if your tax debt arises from your operation of a business? What if you owe not income taxes but some other type of tax? The next few blog posts will get into these questions. 

 

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