A bankruptcy on tax debt can discharge some taxes, but it will depend on the type of debt you have and how long you’ve had it. You can eliminate your entire tax debt if you qualify to be discharged under Chapter 7. Otherwise, Chapter 13 will allow you to pay out your debts in installments in a manner that is manageable and keeps the IRS at bay.
Only income taxes are eligible for discharge. The IRS has strict regulations on what kind of debts qualify for discharge.
Do you think you can eliminate IRS debt in bankruptcy?
In a Hurry? Dial +18-503-850-342 Now!Challenges in Discharging IRS Tax Debt in Chapter 7
There are numerous regulations the IRS has. There are regulations for almost everything. No surprise that there would be some regulation on the discharge of bankruptcy. You do not know whether you can apply for discharge from bankruptcy or not. IRS might complain that, of course, if they get some merit in their case.
What You Should Know Regarding Chapter 7 Bankruptcy and Tax Debt, IRS
Chapter 7 bankruptcy only frees income tax obligations. The boundaries don’t reach much past that. Taxes such as the 1040 are federal income taxes. Property taxes, trust fund taxes, and sales taxes are not income taxes and usually aren’t affected by bankruptcy on tax debt. You will need to know the nature of the tax you’re obligated to pay so that you can fulfill your duty.
If you must file, then you will have filed all of your tax returns for the two previous years. You will have filed two years’ worth of your tax returns for debts that you wish to discharge at the time you file for bankruptcy. Although you may have filed on time on your returns, there remains a waiting period of two years. The IRS will compute a substitute tax return when you do not file your tax return. They will then determine what you owe using that. Substitute tax returns are not tax returns filed by the taxpayer. It is also known as the “two-year rule.”.
Tax Day is not always April 15. Occasionally, Tax Day has been April 16, 17, and even 18. IRS lawyers have protested discharges when the variance was one day. Make sure you file on the right day, or you will have to start all over again. It is also called the “three-year rule.”.
The IRS could not levy your tax obligation eight months ago. Unsecured income taxes under 240 days old will not be dischargeable. The 240-day rule is literal. Since the IRS does this within its ranks, it is difficult to know whether they have levied the debt. If the IRS does not send a bill with the specificity of tax year amounts owed, then the IRS likely has not levied the debt.
How Chapter 13 Bankruptcy Helps with Tax Debt?
In Chapter 13 bankruptcy, your tax liability is segregated into two types:
- Priority Tax Debt: It includes the most recent tax liabilities and other taxes not dischargeable under Chapter 7.
- Non-priority tax debts: They include all tax liabilities that are dischargeable, such as the 3-year, 2-year, and 240-day rules.
Priority tax debts must be paid in their entirety within your payment plan. Non-priority tax debts will be treated as unsecured debts. You will not always have to pay them all, or you can have them erased. When money is owed to the IRS, Chapter 13 has numerous benefits.
- Halts collection by the IRS: This automatic stay prevents wage levy and collection calls during your case.
- Pay taxes in installments: Instead of paying in one sum, you can pay your tax liability in installments each month.
- May reduce penalties and interest: Although the IRS does accrue interest on tax obligations, Chapter 13 can reduce or eliminate penalties.
- Stopping new tax lien: Once your plan takes effect, the IRS cannot file additional tax lien claims against you.
In a Hurry? Dial +18-503-850-342 Now!How Does Chapter 7 Differ from Chapter 13 in Tax Debt?
They don’t have the means to pay their tax debt under Chapter 7. They’re not being called upon by the IRS to make a payment. They have other debt obligations to satisfy, such as automobile loans or arrears in mortgage payments, and they want more time. In some cases, filing for bankruptcy on tax debt can provide the relief they need to better manage their overall financial situation.
A Chapter 13 bankruptcy requires a long-term payment commitment. If you are able to do so earlier, some would prefer to file for Chapter 7 or the payment agreement with the IRS.
Talk to a bankruptcy lawyer to discuss your options if you’re not certain if Chapter 13 is for you. Upsolve will match you with a lawyer in your community who’ll help you through a no-obligation consultation.
How Will Bankruptcy Impact Your Tax Refund?
If you become bankrupt, it may affect your tax refund. But whether you get to keep the money depends on a lot of factors, such as what type of bankruptcy you filed. Most people who experience Chapter 7 bankruptcies can keep their tax refunds. This will, however, depend on the bankruptcy exemptions you use and how you spend the funds. If you are fortunate enough to receive a refund that is not exempt, and it is still there when you file your bankruptcy, then the trustee can use it to pay your creditors.
Tax refunds accrued during your Chapter 13 payment plan can become part of your estate and help pay off your debts. Others modify the withholding of taxes in an effort not to receive excessive refunds during Chapter 13 bankruptcy.
Summing Up!
Even a modest tax debt can escalate rapidly when penalties and interest are added. Even a fairly modest debt will compound. Filing for bankruptcy on tax debt can be an effective solution. Chapter 7 bankruptcy will discharge some income taxes if you qualify under IRS standards. If you do not qualify for IRS relief, Chapter 13 bankruptcy will be helpful. It will give you additional time to pay your debt without letting the IRS hound you.
You can obtain financial relief by seeking out your options. You can schedule a free consultation at Bruner Wright PA so that you can obtain legal advice on your matter from a seasoned attorney.
Bruner Wright, P.A., Attorneys At Law, has been in the industry for a decade, and we will handle your case carefully. Contact now!
In a Hurry? Dial +18-503-850-342 Now!