Bankruptcy and Past-Due Taxes in Indiana

For the last several years, the gig economy has continued to grow. Now, freelancers work over one billion hours a year, and many of these individuals earn substantial money. Lots of work and high incomes are good news in pretty much every context, except for income tax liability.

Frequently, a freelancer’s year-over-year income increases outpace estimated tax payments, and a gap emerges. Once it does, the IRS will do almost whatever it takes to collect that money. And, it has the resources and legal authority to do so.

From a financial perspective, past-due income taxes are unsecured debts, just like credit cards and medical bills. So, they should be completely dischargeable in a Chapter 7. However, from a legal perspective, taxes work a bit differently from other types of unsecured debts.

Special Rules Regarding Tax Discharge

Most government-guaranteed unsecured debt is only dischargeable in certain circumstances, if at all. For example, debtors must establish an undue hardship to receive student loan discharge. With regard to taxes, these rules include:

• – Income Tax Only: Most types of taxes, including property taxes and payroll trust taxes, are not dischargeable under any circumstances. Generally, the taxing authority has the last word on what constitutes “income” tax, since the Bankruptcy Code does not define this term.
• – Three Years: The tax debt must be at least three years old. Note that Tax Day is not always April 15. Additionally, many people file extensions, and the taxing authority may or may not grant these extensions.
• – Two Years: Additionally, the returns must have been on file for at least two years. Substitute returns which the taxing authority files on the taxpayer’s behalf do not count.
• – 240 Days: The IRS or other taxing authority must not have assessed the debt for the past 240 days. Generally, if the taxpayer has not received a notice in the past eight months, the taxing authority has probably not assessed the debt.

If the taxpayer meets these qualifications, the debt is usually dischargeable. There’s no need to show fraud, hardship, necessity, or anything else.

Tax debt discharge usually only eliminates the legal obligation to repay the debt. The debt itself still exists. So, if the taxing authority has already filed liens, the taxpayer must take care of them separately. However, the automatic stay usually applies to other adverse tax collection actions, like lawsuits and audits.

Non-Bankruptcy Alternatives

If the taxpayer does not qualify for discharge, there are usually other options. After all, the IRS really just wants the money. It does not want to punish the taxpayer.

Most people qualify for installment plans. Generally, if the taxpayer’s proposal would pay off the debt before the collection statute of limitations expires, the IRS usually approves the plan. There are several different types of installment plans, so it’s best to talk to an attorney before you sign anything on the dotted line.

Other remedies include the innocent spouse rule and the OIC (Offer in Compromise) program. If the taxpayer qualifies, these things could drastically reduce, or even eliminate, the tax debt.

Work with Diligent Lawyers

Bankruptcy could be the answer to your tax problems. For a free consultation with an experienced Chicago bankruptcy attorney, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.

Resource:

forbes.com/sites/elainepofeldt/2018/10/31/freelancing-economy-continues-to-roar/#39fdb66e7df4

/will-i-lose-my-social-security-benefits-if-i-file-bankruptcy/