TAX SETTLEMENT & OFFERS IN COMPROMISE
DISCHARGING TAXES IN BANKRUPTCY
HANDLING TAX DEBTS THROUGH BANKRUPTCY
Types of Bankruptcy and Timing of Filing
A bankruptcy is started by filing a petition in bankruptcy court. There are several forms of Bankruptcy. One form of bankruptcy is Chapter 7, in which debts including income tax debts are liquidated. Chapter 13 bankruptcies are a reorganization plan that can force a payment plan on the IRS through a bankruptcy trustee. The timing of filing for bankruptcy must be considered very carefully. A premature filing that does not discharge all or most taxes can effectively defeat the taxpayer's overall goals.
The Automatic Stay
Once a bankruptcy has begun, an automatic stay is in place. This is the legal protection given to debtors throughout the duration of the bankruptcy, and all creditors, including the IRS, are prohibited from engaging in collection activity while the automatic stay is in place. The only way a creditor, including the IRS, can remove the automatic stay is by filing a Petition to lift the automatic stay in the bankruptcy court. Petitions to lift or remove automatic stays generally will not be granted to the IRS unless the IRS can prove or demonstrate that fraud is associated with the bankruptcy filing. The IRS is allowed to take some limited actions to determine and access tax debts including the following:
(a) Demanding that any delinquent returns be filed;
(b) Auditing the taxpayer's returns;
(c) Issuing a statutory notice of deficiency;
(d) Assessing liabilities and pre-petition taxes shown on the taxpayer's returns;
(e) Re-filing a notice of federal tax lien; and
(f) Issuing summonses to determine the tax liability.
Taxes That Can Be Discharged in a Chapter 7 Bankruptcy
In a Chapter 7 (or liquidation bankruptcy), income taxes can be discharged if the following rules are met:
The tax return for the year giving rise to the tax must have been due at least three years before the filing of the bankruptcy. This generally means that the three year period would begin on April 15 of the year following the year of the tax in consideration. But, if extensions were filed, it could begin on August 15 or October 15 of the year following the year of the tax in consideration; and
The tax return for the year giving rise to the tax must have been filed at least two years before the filing of the bankruptcy. This means that the two year period would begin on the actual date the tax return was filed; and
The taxes were assessed by the IRS at least 240 days prior to the date of the filing of the bankruptcy; and
The tax return for the year giving rise to the tax must not be fraudulent or have been filed with a willful attempt to evade paying taxes; and
The tax must be an income tax. Several other types of taxes, including the Trust Fund Penalty Tax, payroll taxes, and fraud penalties are not dischargeable in bankruptcy.
Paying and Discharging Taxes in a Chapter 13 Bankruptcy
A Chapter 13 (or reorganization bankruptcy) is a debt repayment plan with monthly payments being made to a court appointed trustee that can last for a maximum of 5 years or a minimum of 3 years. There are numerous issues to be aware of regarding the payment or settling of income tax liabilities in a Chapter 13 bankruptcy:
Taxes may not have to be paid in full, subject to the discretion of the bankruptcy judge. Taxes may be reduced if they are income taxes with returns due more than three years before filing and were assessed by the IRS at least 240 days prior to the date of the filing. Also, if there is no property for an IRS lien to attach to or if the property subject to an IRS lien has limited value or equity, the taxes may be reduced.
If the taxes are taxes with returns due less than three years before filing or were assessed by the IRS not more than 240 days prior to the date of the filing or are otherwise priority taxes, they must be paid in full during the term of the bankruptcy.
Penalties may be reduced.
Tax Liens may be removed upon the completion of the bankruptcy.
The tax return for the year giving rise to the tax does not have to be filed at least two years before the filing of the bankruptcy as in a Chapter 7 bankruptcy. This means that a Chapter 13 bankruptcy can discharge taxes for years where there are unfiled returns.