Bankruptcy can be extremely difficult. You may have dozens of creditors to deal with, especially if your business or partnership is facing bankruptcy. One thing you may not consider is the tax consequences of bankruptcy. If you are facing back taxes during bankruptcy, you may wish to discharge that tax debt alongside other debts. The Roseville tax lawyers at NewPoint Law Group explain when you may be able to discharge tax debt during Chapter 7 or Chapter 13 bankruptcy. Call today for a free consultation with our Roseville bankruptcy tax lawyers today.
Filing Taxes After Chapter 7 Discharge
Chapter 7 is one of the options Californians have for declaring bankruptcy. Under Chapter 7, all assets (except some exempt property) is liquidated (sold-off) to pay creditors. During this process, you often lose access to any money or assets that could be used to pay outstanding tax debts, so it becomes difficult to pay the IRS what you owe them. Fortunately, you may be able to discharge some tax debts.
For your taxes to qualify for discharge during bankruptcy, you must meet a few requirements.
- Tax Type – First, the taxes must be income taxes. You may not be able to discharge other tax debts, such as property tax, tax liens, and most other forms of taxes.
- Three-Year Rule – The taxes must also be at least three years old. This “three-year rule” prevents you from being able to discharge recent tax debt, but may allow you to drop taxes from three or more years ago.
- Filed Two Years Ago – In addition to this three-year rule, you must also have filed the tax return at least two years ago. If you never filed your tax return, filed it late, or the return was too recent, you cannot discharge this tax debt.
- 240-Day Rule – The taxes must also have been assessed at least 240 days before filing – which usually is satisfied if the debt is three years old.
Lastly, your taxes must be properly and honestly filed. Tax debt cannot be discharged if the taxes were based on fraud or tax evasion. There are tax crimes associated with willful non-payment or underpayment. Committing any of these crimes or otherwise failing to file your returns may make you ineligible for discharge. In addition, if you never filed your taxes, you would fail to qualify for the third point above; your tax return would not have been filed at least two years prior if it was never filed.
Note that Chapter 7 bankruptcy can be used for individuals or businesses, but the tax consequences may be different for individual taxpayers and businesses. Talking to a tax attorney can help you understand your options.
Discharging Taxes for Chapter 13 Bankruptcy
Under Chapter 13, the ability to discharge tax debts is very similar to Chapter 7. Chapter 13 is, like Chapter 7, available to Californians who want to deal with their debts. Rather than liquidating most assets, Chapter 13 allows you to reorganize under an approved bankruptcy plan. This may mean you can keep certain assets you would otherwise lose under Chapter 7, and is more akin to debt consolidation in many cases.
Chapter 13 does not allow you to discharge recent tax debt, as these are “priority debts.” Chapter 13 works to reorganize and pay-off these priority debts, often through a fixed plan set in bankruptcy court. Older tax debts, however, are “nonpriority debts” that may be discharged under Chapter 13.
Similarly to Chapter 7 tax debt discharge, these taxes must be at least three years old. They also must have been actually filed at least two years ago, and must have been assessed at least 240 days ago.
You may not discharge tax debt that resulted from willful tax evasion or other nonpayment. Since you cannot discharge debt from taxes you never filed returns for, tax evasion or willful non-payment or underpayment would make you ineligible.
Roseville, CA Bankruptcy Tax Discharge Lawyers
Always talk to a tax attorney when you are considering bankruptcy. Many bankruptcy attorneys will help you consider the financial options, help you prioritize debt appropriately, and will often consider the tax ramifications – but tax lawyers deal primarily with the tax consequences of these decisions. If you have already filed for bankruptcy and are now dealing with the fallout of the tax consequences, our tax debt discharge attorneys may be able to help.
For a free consultation on your tax law needs, call our lawyers today. Our Roseville tax lawyers have experience handling bankruptcy cases and can put that to work in analyzing your tax consequences and your ability to discharge tax debt. Call NewPoint Law Group today at 1-800-358-0305 for a free consultation on your tax case.