How Does Filing Bankruptcy Help Me With Tax Debt?

It is tax season again as I mentioned in the last blog on January 8, 2015. In the previous blog, I spoke about filing for bankruptcy to help correct the amount of taxes you owe because you disagree with the IRS or any other taxing authorities.

But what if you are in a position where you have a tax debt and you do not know what to do? What if the IRS has already filed a lien on your home and personal property? What if the IRS is not willing to work with you? Well, Congress has put into BAPCPA provisions that address these issues. There are certain tax debts which can be discharged in Bankruptcy. Let's take a look at what can be done with tax debts in bankruptcy.

First thing you need to know is that all "Trust Fund Taxes" are entitled to priority status. In other words, Trust Fund Taxes will not be discharged in bankruptcy. Even the interest on the penalty is not dischargeable. So what is a trust fund tax? If you are self-employed who has employees, you are required to withhold certain taxes from the payroll. This withholding is a Trust Fund Tax. Also, if you are self-employed, you are required to pay Social Security and Medicare Tax. This is also a Trust Fund Tax. This is never dischargeable in bankruptcy. Also, if you are the fiscal officer responsible for remitting this Trust Fund Tax, you will also be liable for it.

So now you understand that Trust Fund Taxes are not dischargeable. How about income taxes? Are they dischargeable? The answer is yes! But there are caveats to it being discharged.

Income taxes will not be discharged if the debt was incurred within 3 years prior to filing. That means for example, if you owe debt for the tax year 2011, the tax debt was not incurred until April 15, 2012. So you would have to wait until April 15, 2015 to get your 2011 tax debt discharged, unless you filed an extension to October 15, 2012. Then you have to wait until October 15, 2015 to file for bankruptcy to get that discharged.

However, this three year priority period may be suspended while collection is stayed or prohibited during the following periods plus 90 days

1) A prior bankruptcy proceeding

2) The pendency of a collection due process request, hearing, and appeal

3) A confirmed bankruptcy reorganization plan.

There is also the 240 day rule which means that when the IRS assesses an additional tax after you filed your return, then you have to wait an additional 240 days from that date the IRS assessed you that additional tax before it can be discharged. That 240 day would also be stayed or suspended during the 3 periods stated above.

As you can tell, it is not that easy in determining whether that taxes are dischargeable. It is best for you consult a knowledgeable bankruptcy attorney in the Akron, Canton, New Philadelphia, Wooster area in order to advise you on taxes.

Now what if the IRS has already filed liens on your property? Stay tuned for the next blog on what you can do with these liens inside of bankruptcy.

Submitted 1/15/2015