TAXES IN BANKRUPTCY
Ferguson & Ferguson
Attorneys at Law
Are you one of the many individuals who owe back taxes to the IRS? Income taxes can be discharged under certain conditions, but must meet a 5 part test to qualify for discharge in a bankruptcy case. If they do not meet this 5 prong test then they are generally considered priority taxes that cannot be discharged in a Chapter 7 bankruptcy or must be paid in full in your Chapter 13 bankruptcy case. To make sure that you don’t end up in a situation like this, it may be in your best interest to hire an accountant such as Dave Burton who will be able to help you organize your taxes so you never have to face the possibility of going bankrupt.
In order to discharge taxes in a Chapter 7 or Chapter 13 bankruptcy your taxes must meet a five prong test. If one of these prongs is not met then your income taxes cannot be discharged and will be treated as a priority debt in your bankruptcy.
- Taxes must have been due 3 years ago-The due date for taxes is generally April 15 of each year unless you have filed an extension. In order for your income taxes to meet this requirement you must count back whether the taxes where due more than 3 years ago. For example if you are filing for bankruptcy on March 10, 2015, then taxes that meet this standard would be 2010 taxes since they were due April 15th of 2011 (unless you filed an extension), but 2011 Taxes would not qualify since it would fall short of being due 3 years ago since they would have been due April 15th, 2012.
- When are taxes deemed filed?
- When you mailed them
- If they are late then it is the date the IRS received them.
- Substituted Tax Returns
- Not Signed by the Debtor-Not Filed
- The tax court has ruled that substituted tax returns that were filed by the IRS, but not signed by the debtor where not considered returns under the Bankruptcy Code Section 523(a)(1)(B). According to the tax courts the unsigned substitute for tax return did not meet the definition of return and therefore could not be discharged in bankruptcy. The questions that courts have struggled with is whether you can discharge taxes that have been filed after substitute for tax return has been filed.
- Signed by the Debtor-Filed
- The bankruptcy code includes a return prepared by the government and signed by the taxpayer.
- Not Signed by the Debtor-Not Filed
- The date that your taxes are assessed is not the date of filing. Generally this is the date the IRS officer signs a summary record of assessment. It is a good idea to obtain a record of assessment to determine when your taxes where assessed or Certificate of Assessment.
- Assessment period is extended during the time an offer in compromise is pending plus 30 days.
- Amended tax returns where a deficiency is assessment will alter the date that your taxes where assessed.
- Time is tolled during the time a prior bankruptcy was pending.
- Failing to pay taxes while engaging in “unnecessary and unreasonable expenditures” evidences an intent to evade taxes. Engaging in lavish purchases or transferring of assets while failing to pay your tax obligations indicates an intent to evade taxes.
- Failing to pay taxes has not been found alone to indicate intent to evade taxes.
- Chapter 7 Bankruptcy – If your total assets at the time of filing are $10,000 and a tax lien was recorded for $50,000, then the bankruptcy reduces the tax lien to $10,000 (the value of your assets at the time of filing).
- Chapter 13 Bankruptcy- If your total assets are worth $10,000 at the time of filing and there is a recorded tax lien for $60,000, then $10,000 would be treated as secured tax debt as part of the bankruptcy and the remaining portion should be treated as unsecured tax debt.
Interest on Taxes Are Dischargeable
The general rule for interest on taxes is that they are dischargeable if the initial tax meet the requirements to be discharged. If your income taxes meet the requirements to be discharged then any interest that has accumulated will also be subject to discharge.
Penalties on Taxes May be Dischargeable
Penalties may be dischargeable even if your tax does not meet the standard to be discharged in bankruptcy. The general rule is that if the event that gave rise to the tax penalty occurred more than 3 years before the filing of your bankruptcy case then the penalty can be discharged in bankruptcy. Penalties that were imposed as a result from actual pecuniary loss incurred.
Non Dischargeable Taxes
- Employee Taxes-Taxes that are collected by employer to pay employee portion of taxes are not dischargeable.
- Sales Taxes-Generally in most taxes these are considered trust fund taxes that are not dischargeable in bankruptcy. In California they are dischargeable because they dont fall into this category and therefore you can discharge them as part of your bankruptcy.
Discharging taxes in bankruptcy can be tricky and requires careful examination of your income taxes and the circumstances surrounding their filing and assessment. If you owe income taxes we will review your facts to determine if we can discharge your taxes in a Chapter 7 bankruptcy or have you pay less than 100% in a Chapter 13 bankruptcy. The law firm of Ferguson & Ferguson can help. Call 256-534-3435..