Bankruptcy Common Questions: Taxes

Bankruptcy Common Questions: Taxes

As an Albuquerque bankruptcy lawyer there are some questions which people seeking a bankruptcy ask on a regular basis. Usually I am asked about student loans and taxes. I recently made a post on student loans, but figured I would make a follow up to cover taxes. Bankruptcy is just one option to a debtor faced with tax problems; for example we help debtors setup an installment payment plan, offer in compromise, or obtain non-collectible status. Filing a bankruptcy can help you determine if your taxes can be discharged through this process. A Chapter 7 or Chapter 13 bankruptcy can be used to relieve the taxpayer of tax liability. Only certain taxes are subject to discharge such as income taxes, whereas payroll taxes are not subject to discharge through bankruptcy. To discharge taxes through a bankruptcy certain requirements must be met:

1. The debts must be old enough – the taxes owed must be at least 3 years older than when the taxes were due. For example 2003 taxes are due in 2004, so a bankruptcy filed in 2006 would mean that this requirement is not met (note that the due date includes extensions also). Or in other words if the taxes are 4 or more years old, this requirement will be satisfied. A taxpayer must also have filed their last 4 years of taxes before the first creditors’ meeting during the bankruptcy process.
2. The taxpayer must have filed tax returns – Basically the taxpayer has to have filed a tax return more than 2 years prior to the bankruptcy. Tax liability assessed as a result of unfiled tax returns cannot be discharged through bankruptcy.
3. Tax assessment – The taxes must have been assessed more than 240 days before the filing of the bankruptcy, regardless of Chapter 7 or 13.
4. No fraud/evasion – The taxpayer must not have tried to commit fraud by filing a false tax return, and the taxpayer must not have tried to evade paying owed taxes.
5. Unsecured – The tax must be unsecured, meaning that if a lien already exists on the taxpayers property the debt has thus become secured by the lien.

The difference between a Chapter 7 and Chapter 13 is that the latter only has the debt reduced, whereas the former allows a complete discharge of the debt. To file for a Chapter 7, the debtor must pass what is referred to as the means test otherwise the debtor will be forced to file a Chapter 13 bankruptcy. A bankruptcy attorney can help you determine if you can file a Chapter 7, and whether filing a bankruptcy will help you with your tax liability issues.