Bankruptcy can be an effective way to get rid of tax debt, but you must first understand
some basic principles about taxes and bankruptcy law.
“Let me tell you how it will be.
There’s one for you, nineteen for me.”
So begins my personal favorite Beatles song. Taxman written as a searing attack on the
British Crown while the Beatles struggled with Her Majesty’s tax collectors in the 1960s.
It would be a welcome tune on any Tea Party mix tape. So, if you’re not John, Paul,
George and Ringo, what do you do about taxes, and how does bankruptcy come into it?
Well, about the dumbest thing anyone in these United States can do is fail to file your
income taxes. (Note that I said “file,” not “pay.”) Whatever harebrained scheme you’ve
been told will work to avoid paying taxes is just that, a scheme. I have seen the biggest,
strongest tax protesters quivering in fear when the IRS comes a knockin’ with its arsenal
of liens, attachments, garnishments, levies, and the old stand-by, jail time. Repeat after
me: “I’ll always file my tax returns.”
Now, how will bankruptcy help you when you cannot PAY your taxes? I don’t have
space in this short blog to cover all the bankruptcy rules about discharging or getting
rid of tax debt. I’m just gonna cover the big ones.
Keep in mind that the goal in bankruptcy is to discharge debt. Taxes are just a form of
debt. The Bankruptcy Code limits the discharge of tax debt, and all the ins and outs of
those provisions are complex. However, there are special rules you can follow to get rid
of (or discharge) tax debt. First Rule is, guess what? You have to FILE your tax returns!
Once you’ve filed the returns, even if they are late, then you see if you can discharge the
The Second Rule deals with time. You’ve gotta be patient. You can only discharge
income taxes if they’re for a tax debt that’s been due and payable more than three years
prior to the date you file bankruptcy. Simply put, you can’t discharge income taxes for
the last three years that are due before you file bankruptcy.
Like everything, it’s not quite that simple. Income tax returns are due on April 15 of
every year. UNTIL April 15, the previous year’s taxes aren’t due and payable. For
example, until April 15, 2012, income taxes for 2011 are NOT due and payable. That
means that if you want to see if you can discharge taxes you’ve gotta wait until after the
April 15 deadline for filing for the last three tax years you’re counting. That’s very
important if you owe taxes for tax year 2006, for example. If you file before April 15,
2010, then the last three years you can’t get rid of are: 2008, 2007 and 2006 because
2009's aren’t yet due and payable. So, you have to wait. Be patient and file after April
15, 2010 to discharge 2006 income tax debt.
The other part of the Second Rule dealing with time is that the tax returns themselves
have to have been filed more than two years’ prior to the date you filed bankruptcy.
That’s real important for you tax protesters out there. If you file ten years’ of income tax
returns all at one time you’ve gotta wait to file bankruptcy, even though they’re for tax
years that are way more than three years due and payable. You’ve gotta wait until two
years from the date you filed all those returns to file bankruptcy or none of the tax debt
I can’t remember how many clients I’ve had come in who’ve had to file back returns
and wait to file bankruptcy before they could discharge taxes. I had someone the other
day who filed about six years of returns for years which all were more than three years
ago. However, they just filed the returns. Thus, we agreed that they will be patient. I
will be filing bankruptcy for them in 2012 so that two years will have gone by from the
date they filed their tax returns.
Space does not permit me to cover all the complexities of income tax discharge issues,
and the options available in bankruptcy to deal with them, and this post is no substitute
for the advice of an experienced bankruptcy attorney. But, more information is
available on my website on whether you can discharge back taxes and not have to pay
them at all in Chapter 7 bankruptcy, whether you can pay a reduced amount and stop
penalties and interest from running in chapter 13 or chapter 11 bankruptcy and how tax
liens and levies are handled.
Just remember the Big Rule: unless you can leave your country like the Beatles, you
have to file your taxes. And you may have to pay them, unless maybe I can help you
with them in bankruptcy court.
(See the special tax disclaimer on the Disclaimers section of this website).
Filing bankruptcy will stop immediately the taxing authorities from garnishing wages,
seizing and selling assets, and closing your business. It will also stop them from taking
other actions like filing tax liens. Finally, it usually will take the matter out of the hands
of the taxing agent with whom you are dealing and put it in the hands of a trained
person in the bankruptcy department of the taxing authority, which may defuse a
situation where it may seem to have gotten personal.
That being said, this is a very complicated area and depends on, well, a TON of factors,
including the type of taxes you owe, the years for which those taxes are owed, who was
responsible for paying the taxes, whether the taxes are an automatic lien on any real
estate, whether the taxing authority has filed a lien, and whether you have actually filed
tax returns on time and, if not, when you filed them. It depends on how much time has
gone by between the time the taxes were filed and when they were assessed, and when
the bankruptcy was filed.
Finally, it depends on which type of bankruptcy you file. It may depend on whether
your ex-spouse filed tax returns for you and you may claim innocent spouse protection.
I would advise you to make an appointment with a tax attorney who is knowledgeable
in this area and have all of your facts straight regarding the above questions for the
appointment. Also, understand that you need to have a copy of all of your tax returns
and notices from the taxing authority for any attorney to advise you properly. A change
in one variable may mean the difference between what the attorney’s having told being
correct or totally wrong. It will not be the attorney’s fault if you provide incorrect or
In general, if you file a chapter 7 bankruptcy and the INCOME taxes are for a tax year
that is due and payable more than 3 years ago (for example, after April 15, taxes are
deemed due and payable so, after 4/15/06 we are talking about 2002 taxes); AND if the
income tax returns were filed more than two years before the chapter 7 bankruptcy
filing, then you may be able to discharge those taxes. There also is a specific
requirement regarding the number of days before the filing that the taxes were assessed
which you must consider to find out whether those taxes are dischargeable.
Also, if a tax lien has been filed, then you have to pay the IRS/SC/NC the value of its
collateral (which is everything you own, minus the value of any superior liens), even
though the debt is discharged by the chapter 7 bankruptcy. You may have to sue the
IRS to figure out the value of what you have to pay the IRS to get rid of the lien. And
then, of course, the SC Department of Revenue does not recognize some of these
These same rules apply to state income taxes. Sales taxes are dischargeable in chapter 7
bankruptcy. Property taxes for personal property taxes are dischargeable as long as the
chapter 7 bankruptcy is filed before the taxes are due and payable.
Regarding withholding taxes: you just have to pay them.
If you file a chapter 13 bankruptcy there are a few extra rules, but all of the above rules
are the same. However, remember that a chapter 13 bankruptcy plan is a way for you to
repay your debts. A dischargeable debt in a chapter 13 payment plan is just a type of
debt of which you could, if you qualify, pay less than 100%. For example, all of the
dischargeable debts listed above, if they were paid in a chapter 13 bankruptcy plan, are
the types of debts that you could pay at the same percentage rate as your VISA bill and
doctor bill…..at perhaps as low as 1% of the balance. You also would not pay interest in
many situations and tax penalties and interest usually stop at the time of the chapter 13
In brief, the same rules apply if you file a chapter 11 bankruptcy, except you have to
pay interest on the taxes, but penalties stop and you do not necessarily have to pay any
tax payments until your chapter 11 bankruptcy payment plan is confirmed, or
approved, which could take months or even longer.
If you file a chapter 13, you must keep your taxes filed and current for the years you are
in the chapter 13 repayment plan or your case can be dismissed. Also, you have to send
the trustee a copy of your federal tax return for each year you are in the chapter 13
payment plan. Finally, you must have filed all of your tax returns for a chapter 13
repayment plan to be confirmed.
visit: http://www.falaw.us/ for more information.
Figeroux & Associates
26 Court Street, Suite 701
Brooklyn, NY 11242