Can You Eliminate Taxes In Bankruptcy?
Can you get rid of and eliminate tax debt owed to the Internal Revenue Service or State of California Franchise Tax Board or other taxing agencies such as the California State Board of Equalization (now the DTFA)?
Or, as many often ask: Can you include taxes in a bankruptcy filing?
The answer in many cases is : “YES!” Certain tax debts are dischargeable or may be managed in bankruptcy.
The primary relevant factors to determine dischargeability (see more specifics below) are
- the age of the taxes (determined by calculating from the date the returns were last DUE to be filed),
- the date of assessment of the taxes (determined by the taxing agency),
- the dates you filed your required returns (IF they were filed)
- and whether you willfully attempted to evade payment of the tax by fraud.
Whether you can discharge (eliminate) these taxes in a bankruptcy case depends on a combination of the above factors (and certain other miscellaneous factors) as well as under what chapter of bankruptcy you file.
Requirements for Discharge of Income Taxes in Bankruptcy:
There are several prerequisites that must be met before any income tax can be discharged in bankruptcy.
The minimum requirements for discharging federal or state income taxes are (all of the following must be met):
- it has been more than 3 years since the returns were last DUE (including extensions) to be filed,
- the returns were timely filed or it has been at least 2 years since the returns were filed,
- there was no fraud involved or attempts to evade the tax, AND,
- the taxes were not assessed within the last 240 days.
There are many exceptions and events which can extend the time periods on the above rules, so you should not conclude without having actual transcripts analyzed by an attorney expert with tax discharge issues that your taxes will or will not be discharged in a case you file.
Even if you cannot get rid of your tax debt fully in a Chapter 7 bankruptcy case, you may be able to discharge some of it, and enter into a more favorable repayment plan for the taxes than you otherwise could outside of bankruptcy in a Chapter 13 or Chapter 11 case.
Tax Liens And Bankruptcy
Liens of any kind remain after a bankruptcy discharge is entered. Even if the underlying debt is discharged. However, the lien only remains against property that exists on the date the bankruptcy case is filed.
For example, if you own real estate that is subject to a tax lien, you can (if you meet the above requirements) discharge the tax debt, but the lien will remain against the property until it is sold or refinanced and the taxes paid.
However, the lien cannot attach to any new assets acquired after filing the bankruptcy case. So there is a definite benefit to discharging tax debts even where there is a lien attached to property.
Federal tax liens (Internal Revenue Service, for example) can attach to ANYTHING you own, including retirement accounts and right down to your socks and underwear. Often, this does not amount to much and it is possible to get the taxing agency to “abate” the tax and release the lien after a discharge if the value of property to which the lien has attached is of relatively insignificant value.
This is something a good bankruptcy attorney can negotiate after your case is completed.
Discharging California Sales Tax and Other Taxes
Sales taxes and other taxes, such as those owed to the State Franchise Tax Board, or Board of Equalization (now called the California Department of Tax and Fee Administration) or Employment Development Department may also be dealt with in a bankruptcy case.
In California, discharging sales tax liability requires the same elements listed above for income taxes. The additional issues with sales taxes is that the business that generated the liability must be closed so that no new sales tax liability can be assessed and the taxes must have been actually assessed against you (the individual) as the responsible party more then 240 days before filing the bankruptcy case.
Tax Payment Plans In Chapter 13 Bankruptcy
If you are not eligible for your taxes to be fully discharged in bankruptcy (or for which there is a lien you need removed), you may be able to utilize Chapter 13 to do a repayment plan to eliminate the tax and remove the lien. This can enable you to make payments on your tax debts for up to 60 months, while still eliminating other debts (such as credit cards, medical bills, etc.) for a payment your budget can afford.
The payment plan will usually be at zero percent interest, unless there is a lien against property.
The amount you pay will be based on your budget, and also on the amount owed to the taxing agencies for taxes that are not “dischargeable”.
There are limitations and eligibility requirements for Chapter 13, so be sure to consult with an experienced bankruptcy attorney about your options.
Don’t Try This At Home
Bankruptcy tax debt analysis is extremely tricky and the only way to correctly determine if taxes are dischargeable in your case is to have a bankruptcy attorney with specialized knowledge analyze your situation. This requires obtaining an official account tax transcript from the taxing agency which contains the necessary codes to do the statutory analysis.
The most important thing to do if you are having tax problems is to investigate bankruptcy as a possible alternative to dealing with your taxes. This is particularly true if it has been more than three (3) years since the tax returns for the years you owe were last due to be filed.
For more information on California Taxes visit the California Tax Service Center.
For other dischargeable debts, please see my bankruptcy discharge page.