Taxes In Bankruptcy

What To Expect

All kinds of tax problems can be addressed through bankruptcy. Taxes are not generally dischargeable or forgivable, therefore so frequently a Chapter 7, which is a discharge or liquidation bankruptcy, is ineffective and inadvisable for handling tax matters. It is more often me case that a Chapter 13 provides the most effective means of controlling and solving tax problem.

If you are currently experiencing tax problems, the stresses are varied and great. You may be concerned about garnishment, liens and seizures of property, as well as the uncertainty of not knowing what your rights are.

If you choose to file a Chapter 13 Bankruptcy, you would be protected from continued collection attempts by the “automatic stay” that becomes effective immediately upon the filing of your case.

The Automatic Stay restrains all your creditors, including the tax agencies from any collection activities outside the Court plan. This filing prevents (with certain exceptions) further interest and penalties from accumulating on the tax debt. This protection does not apply to taxes incurred after the filing of the case.

Due to the intricate system of regulations and allowances on tax matters, you should always seek a legal opinion before making the decision to file a bankruptcy case. Many attorneys, like Mr. Davis, offer a free initial consultation, where they will answer all your questions, and advise you of your options.

Sometimes there are tax relief options available other than bankruptcy. The IRS now offers a program called “offer in compromise” which can be utilized when there is a doubt as to the ability to collect the whole tax debt, or if there is a question as to the validity of me liability for the tax debt. Your attorney should be able to advise you if this option applies to your situation.

Sometimes people contact us about wanting to “come clean” with me I.R.S. They have not filed, or filled out, tax returns for some periods of time and want to file the returns and pay what they owe. If this is the case, we recommend that you get your returns prepared and then bring the returns to us, prior to filing a bankruptcy case. This will help us ascertain your liability and in calculating a payment plan.

If your tax liability is over 3 years old, and the returns have been timely filed they can generally be discharged in bankruptcy. If they are less than 3 years old, or if they are employment trust fund taxes, there is still relief available

Paying those non-dischargeable taxes through a Chapter 13 bankruptcy can be much more economical than paying them direct to the IRS because they can either be paid with no interest or reduced interest.

Bankruptcy Court is also a good forum to litigate tax disputes, if they have not been previously decided by the United States Tax Court or a Federal or State District Court. If you need further information, or have questions not covered in this recording, please call us and we will be glad to assist you.