If I am filing bankruptcy, can I also discharge any taxes I owe? I get this question way too much these days and it is never pleasant.
Neither, unfortunately, is the answer, "maybe.
" Like anything that has to do with our government, the rules and limitations for discharging your tax debt through bankruptcy are complicated and are most likely to benefit you if you carefully examine your options, plan ahead, and hire some professional help.
Income Tax Rule In order to eliminate your tax liability through bankruptcy, it has to clear the following hurdles: Be more than three years old - the three year clock starts ticking on the date the tax return for the year in question was due; so April 15, 2010 for 2009 taxes.
Note that this is the minimum time in which you can include taxes in your bankruptcy and that certain circumstances could extend this even further.
Be filed at least two years ago - the date that you file the bankruptcy petition must be at least two years after the date that the tax return was filed.
This is relevant if you filed an extension, were late to file, or just plain failed to file a return.
The motivation here is plain, get those damn things filed! Even if you don't have enough money to pay the taxes due it is almost always better to file without paying then not file at all.
Have not received an assessment from audit adjustments or amended returns in at least 240 days.
This could be extended by an Offer in Compromise (see below).
Basically, this means that your return was amended, either by yourself or by the IRS, and additional tax was assessed because the original return was incorrect.
No fraud or evasion - as you may have guessed, your rich Uncle Sam gets pissed off when people try to deceive him, and so fraudulent returns or tax evasion can mean that your debt is not dischargeable in bankruptcy.
Two Bankruptcy Options Chapter 7 - "The Full Monty," and what people usually mean when they say bankruptcy, Chapter 7 is when everything except certain exempt assets are sold and then the money is divided up between your creditors.
Chapter 13 (11 for businesses) - or "reorganization," is when a plan is made for you to repay your debts under court supervision.
Essentially, Chapter 13 allows you to put together a plan with all debtors and then set up a system of repayment.
As part of the bankruptcy some of the amounts due can be reduced or new terms can be established.
Limitations of Bankruptcy Taxpayer Beware: the above rules only pertain to federal income tax due.
State taxes are a whole different ballgame and will have to be resolved on a state by state basis.
In addition, the following taxes cannot be eliminated in a bankruptcy: Self-Employment Taxes - this one can be particularly tricky because so many entrepreneurs just get their self-employment taxes lumped in with the rest on their 1040s and don't really think about them.
However, you'll have to separate these if you are considering filing bankruptcy to see how much of your tax is really potentially dischargeable.
Payroll Tax Withholding - Like self-employment taxes, you can't discharge your payroll tax withholding in a bankruptcy.
State Sales Taxes - ditto Various Other Taxes That I Have Forgotten to Include - No, those are not dischargeable either.
Options to Bankruptcy Most taxpayers who owe federal taxes will at least consider the alternatives to bankruptcy, if only because there is no way in Hell the IRS will let you get by three years before assessing you for taxes due.
Installment Agreement - like any other creditor, the IRS can, at its discretion, put taxpayers on payment plans to help them settle their debts.
Note, however, that interest and penalties will still apply and so it is in your best interest to pay the amount due as quickly as possible.
Collection Due Process - a CDP can be filed with the IRS to protect your right to go to court and is filed after you have received a Federal Tax Lein or an Intent to Levy.
Basically, with a CDP you are signaling your intent to dispute the assessment.
File to protect your right to go to court.
Offer In Compromise - Make a deal with the Devil and ask the IRS to reduce your burden by accepting partial payment.
The IRS may decide to accept an Offer in Compromise if there is some doubt about the legitimacy of the amount you are purported to owe, if there is no doubt as to the legitimacy of the payment but there is no way you have the ability to cover the payment, or if you have the assets to cover the payment but there are some remarkable extenuating circumstances that convince the IRS to have mercy on your soul, like you're abducted by aliens and have to pay the ransom.
What does this mean if I am behind on my taxes and I owe the IRS money? In theory, people in economic trouble shouldn't really owe taxes because they don't have much income.
However, as with just about everything in life there are 5,001 potential outcomes that could result in your owing taxes and not having the cash to come up with the payment.
Step One: File all returns.
Remember that you will have to have filed at least two years before filing for bankruptcy if you hope to have your taxes discharged, so make sure that you are up to date.
Step Two: Protect your spouse.
If the tax burden, and accompanying inability to pay, is the result of the activities of one spouse then consider filing married filing separate to protect the other spouse.
This usually happens when one spouse is an aspiring Donald Trump or Oprah Winfrey while the other is a mild-mannered librarian.
Step Three: Is the inability to pay due to a permanent or temporary change in fortune? If your business was wiped out and folded sometime between the beginning of the year and when your taxes are due then you are a prime candidate for some sort of deal with the IRS.
On the other hand, if you can't pay your tax bill because you already spent the money without budgeting enough for taxes then you are most likely a candidate to get on some sort of payment plan.
Step Four: Pull the trigger.
Either way, don't duck the issue and hope that it will go away.
Take the bull by the horns, get your returns filed, and then seek some professional council on how you can get the situation resolved.
Neither, unfortunately, is the answer, "maybe.
" Like anything that has to do with our government, the rules and limitations for discharging your tax debt through bankruptcy are complicated and are most likely to benefit you if you carefully examine your options, plan ahead, and hire some professional help.
Income Tax Rule In order to eliminate your tax liability through bankruptcy, it has to clear the following hurdles: Be more than three years old - the three year clock starts ticking on the date the tax return for the year in question was due; so April 15, 2010 for 2009 taxes.
Note that this is the minimum time in which you can include taxes in your bankruptcy and that certain circumstances could extend this even further.
Be filed at least two years ago - the date that you file the bankruptcy petition must be at least two years after the date that the tax return was filed.
This is relevant if you filed an extension, were late to file, or just plain failed to file a return.
The motivation here is plain, get those damn things filed! Even if you don't have enough money to pay the taxes due it is almost always better to file without paying then not file at all.
Have not received an assessment from audit adjustments or amended returns in at least 240 days.
This could be extended by an Offer in Compromise (see below).
Basically, this means that your return was amended, either by yourself or by the IRS, and additional tax was assessed because the original return was incorrect.
No fraud or evasion - as you may have guessed, your rich Uncle Sam gets pissed off when people try to deceive him, and so fraudulent returns or tax evasion can mean that your debt is not dischargeable in bankruptcy.
Two Bankruptcy Options Chapter 7 - "The Full Monty," and what people usually mean when they say bankruptcy, Chapter 7 is when everything except certain exempt assets are sold and then the money is divided up between your creditors.
Chapter 13 (11 for businesses) - or "reorganization," is when a plan is made for you to repay your debts under court supervision.
Essentially, Chapter 13 allows you to put together a plan with all debtors and then set up a system of repayment.
As part of the bankruptcy some of the amounts due can be reduced or new terms can be established.
Limitations of Bankruptcy Taxpayer Beware: the above rules only pertain to federal income tax due.
State taxes are a whole different ballgame and will have to be resolved on a state by state basis.
In addition, the following taxes cannot be eliminated in a bankruptcy: Self-Employment Taxes - this one can be particularly tricky because so many entrepreneurs just get their self-employment taxes lumped in with the rest on their 1040s and don't really think about them.
However, you'll have to separate these if you are considering filing bankruptcy to see how much of your tax is really potentially dischargeable.
Payroll Tax Withholding - Like self-employment taxes, you can't discharge your payroll tax withholding in a bankruptcy.
State Sales Taxes - ditto Various Other Taxes That I Have Forgotten to Include - No, those are not dischargeable either.
Options to Bankruptcy Most taxpayers who owe federal taxes will at least consider the alternatives to bankruptcy, if only because there is no way in Hell the IRS will let you get by three years before assessing you for taxes due.
Installment Agreement - like any other creditor, the IRS can, at its discretion, put taxpayers on payment plans to help them settle their debts.
Note, however, that interest and penalties will still apply and so it is in your best interest to pay the amount due as quickly as possible.
Collection Due Process - a CDP can be filed with the IRS to protect your right to go to court and is filed after you have received a Federal Tax Lein or an Intent to Levy.
Basically, with a CDP you are signaling your intent to dispute the assessment.
File to protect your right to go to court.
Offer In Compromise - Make a deal with the Devil and ask the IRS to reduce your burden by accepting partial payment.
The IRS may decide to accept an Offer in Compromise if there is some doubt about the legitimacy of the amount you are purported to owe, if there is no doubt as to the legitimacy of the payment but there is no way you have the ability to cover the payment, or if you have the assets to cover the payment but there are some remarkable extenuating circumstances that convince the IRS to have mercy on your soul, like you're abducted by aliens and have to pay the ransom.
What does this mean if I am behind on my taxes and I owe the IRS money? In theory, people in economic trouble shouldn't really owe taxes because they don't have much income.
However, as with just about everything in life there are 5,001 potential outcomes that could result in your owing taxes and not having the cash to come up with the payment.
Step One: File all returns.
Remember that you will have to have filed at least two years before filing for bankruptcy if you hope to have your taxes discharged, so make sure that you are up to date.
Step Two: Protect your spouse.
If the tax burden, and accompanying inability to pay, is the result of the activities of one spouse then consider filing married filing separate to protect the other spouse.
This usually happens when one spouse is an aspiring Donald Trump or Oprah Winfrey while the other is a mild-mannered librarian.
Step Three: Is the inability to pay due to a permanent or temporary change in fortune? If your business was wiped out and folded sometime between the beginning of the year and when your taxes are due then you are a prime candidate for some sort of deal with the IRS.
On the other hand, if you can't pay your tax bill because you already spent the money without budgeting enough for taxes then you are most likely a candidate to get on some sort of payment plan.
Step Four: Pull the trigger.
Either way, don't duck the issue and hope that it will go away.
Take the bull by the horns, get your returns filed, and then seek some professional council on how you can get the situation resolved.
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