Before considering Chapter 7 as a means of wiping out your tax debt, you must review each tax claim with a qualified Tax-Bankruptcy attorney. The last thing you want to do is file a bankruptcy and later discover that your tax debt was not eliminated. If done right, the bankruptcy filing can be an effective weapon to not only eliminate your IRS tax debt, but it can also eliminate state tax debt, medical bills and other high balance credit card and other consumer debt.
How to get tax debt relief in a Chapter 7 bankruptcy
To wipe-out income tax debt in a Chapter 7 bankruptcy debt, the tax debt must have been incurred or due three years before the bankruptcy case is filed, considering any extension of time to file the tax return.
The taxpayer must have filed the tax return and not the IRS or state taxing agency. Therefore, tax claims based upon Substitute for Returns (or “SFR” returns) are usually not capable of being cleared unless you file a return and ensure that the IRS abates the SFR return and accepts your late income tax return for filing. And remember, you cannot file the tax return late, and if you do, you must be certain the tax return was filed at least two years before filing for bankruptcy.
Lastly, each tax assessment, and there could be multiple assessments for one tax period (original return, amended return, examination adjustment), must be made at least 240 days prior to the time that bankruptcy case is filed.
But be careful, the tax discharge-ability rules are complex, particularly because there are several events which could easily suspend the running of these tax discharge-ability periods – these are called “tolling events” which exist based on actions of the taxpayer such as previous bankruptcy, offer-in-compromise, collection due process hearing requests, appeal of an installment agreement, the filing of an extension to file your tax return and many more.
Additionally, even if the tax debt is cleared in bankruptcy, the taxpayer must analyze the impact of the lien on property of the taxpayer. To escape the tax debt and defeat the taxing agency lien rights requires the expertise of an experienced Tax-Bankruptcy attorney.
Frequently asked questions that taxpayers ask when considering bankruptcy to clear tax debt include:
Is Chapter 7 an effective tool for eliminating tax debt?
One of the benefits of having substantial tax debt is that you may more easily qualify for Chapter 7 which is the preferred chapter proceeding since you don’t have to repay any of your past debt. Normally, to qualify for Chapter 7, you must qualify under the “means test” which in simple terms, means if you have too much disposable income, you cannot qualify for Chapter 7 and instead, must file a Chapter 13 and make payments for 5 years. However, if more than one-half of your total debt is “non-consumer” debt (psst, tax debt is NOT consumer debt), the means test does not apply to you and you may qualify for Chapter 7.
What happens to interest in a Chapter 7 bankruptcy?
The discharge-ability of interest generally follows the discharge-ability of the underlying tax so that if a tax debt is discharged in bankruptcy, the interest on that tax is also eliminated. On the other hand, interest accrued on non dischargeable tax debt is also non-dischargeable.
What happened to penalties in a Chapter 7 bankruptcy?
Similarly, to interest, the discharge-ability of a tax penalty generally turns on the discharge-ability of the underlying tax debt. Thus, if the tax penalty is one that is not meant to compensate the government for an actual pecuniary loss, it can be eliminated even if it relates to a non-dischargeable tax when the penalty was “imposed with respect to a transaction or event” which occurred more than three years prior to the date of the bankruptcy filing.
At Tax Workout Group, we craft innovative and tailored solutions with one goal in mind – the resolution of tax claims in bankruptcy. Our client’s hire us to ensure that they eliminate or otherwise reduce their tax claims to the greatest extent possible. Contact Us Today!
