.:Discharging Taxes:.
Bankruptcy can provide relief from tax debts. Some taxes and penalties are dischargeable; those that can't be discharged can be paid without interest in Chapter 13. The automatic stay in bankruptcy stops even collection actions by taxing authorities, including garnishment and seizure. These provisions of the law apply equally to state and federal tax agencies.
In general unsecured income taxes that were first due more than three years before the bankruptcy is filed, for which a timely and non fraudulent return was filed, can be discharged in full in any chapter of bankruptcy. The following rules are used to evaluate each tax claim:
Five Rules to Discharge Tax Debts
If the income tax debt meets all five of these rules, then the tax debt is dischargeable in Chapter 7 and Chapter 13 bankruptcy petitions.
- The due date for filing a tax return is at least three years ago.
- The tax return was filed at least two years ago.
- The tax assessment is at least 240 days old.
- The tax return was not fraudulent.
- The taxpayer is not guilty of tax evasion.
The third rule regarding assesment dates means the taxes must have been assessed at least 240 days prior the bankruptcy filing date. This usually isn’t a problem, except in the context of an audit that occurs after the return is filed, which may trigger the running of a new 240 day period after the audit assessment.
Non-Dischargeable Taxes
Meanwhile, payroll taxes -- Social Security and FICA -- or employee withholdings that you owed cannot be discharged, even after three years. Priority taxes Taxes first due within three years of the bankruptcy and taxes assessed within 240 days of the bankruptcy, or which are unassessed but assessable when the case is filed, are priority claims which are not subject to discharge. Priority taxes will survive a Chapter 7 discharge to the extent that the trustee does not have money in the estate to pay them. In Chapter 13, such taxes must be paid in full through the plan; penalties associated with those taxes, however, can be treated as a non priority claim and paid a fraction along with other unsecured claims. Taxes for which no return has been filed are not dischargeable in bankruptcy. If a return was filed late, for a year outside of the priority tax period, the return must have been on file for two years for the tax to be discharged in bankruptcy.
.:Chapter 13:.
Under this form of bankruptcy, designed for wage earners "with regular income," you agree to a plan to pay off some or all of your debts over a period of time, usually three to five years. Non-Dischargeable taxes (i.e. taxes less than three years old) are priority claims and will be paid before general creditors.
One of the most powerful attributes of Chapter 13 is its treatment of tax liabilities for which the taxing authorities don't file a claim: **If no claim is filed, the tax is discharged upon completion of the plan, even though under no other legal theory could the debtor escape liability without payment!**
In the case of trust fund taxes, e.g. taxes withheld from an employee's wages, this may be particularly useful where individual corporate officers may have liability for unpaid trust fund taxes which has not been assessed against the individuals. The IRS is not always efficient in matching the trust fund liability of a corporate or partnership entity with the bankruptcy case of an individual who may be liable for that tax.
Chapter 13 can therefore be used to force the taxing authority to file a claim or risk being discharged. If a claim is filed, the debtor can pay it according to the priority of the tax and the terms of the plan. If the amount of the tax is too large to be paid from projected income, the debtor is free to dismiss the bankruptcy and pursue an offer in compromise with the taxing authorities.
*Tax liens filed against your property are an exception: they survive the bankruptcy, regardless of whether a claim is filed, unless paid through the case or avoided as not attaching to value at the commencement of the case.
Even the IRS doesn't mess with the bankruptcy courts. When the courts say the tax is discharged or impose an automatic stay against collection, that's it. It's over. When the IRS didn't follow the rules, the United States Bankruptcy Court for the Southern District of Florida in a decision rendered in December 1999 found the agency to be in contempt of court and fined it $10 million. In re Cohen (Bankr. S.D. Fla. Dec. 28, 1999)
