Does Bankruptcy Take Care Of Back Taxes?
The IRS claims that intentional and unintentional underpayment costs the government about $1 trillion a year. That figure is higher than the GDP of most of the world’s countries. Over the years, lawmakers have given the IRS powerful collection tools that private sector debt-buyers dream about. Usually, the IRS does not need a court order to garnish wages, liquidate assets, levy bank accounts, and take other adverse actions. If you have unpaid taxes, it’s only a matter of time before you show up on the Service’s radar.
Rather than dealing with the IRS’ complicated repayment programs, a Chicago bankruptcy lawyer can quickly eliminate this debt in many cases. Alternatively, bankruptcy offers an income-based repayment plan which almost everyone qualifies for. Either way, bankruptcy offers a much quicker path to a fresh start than the programs the government offers. Bankruptcy has other benefits as well. It protects your assets from creditor seizure, discharges most unsecured debts, and generally lets distressed debtors start over.
Repayment in a Chapter 13
Most IRS repayment plans either have very limited qualifications or they require debtors to liquidate some assets or otherwise pay down their tax debts. That’s especially true if the taxpayer owes more than a few thousand dollars.
However, as mentioned, a Chapter 13 repayment plan is based solely on the debtor’s income. The trustee (person who oversees the bankruptcy for the judge) consolidates all allowed claims payments into one monthly payment. “Allowed claims” usually include secured debt arrearage, such as past-due mortgage payments, as well as certain unsecured debts which are not dischargeable, such as back taxes.
As long as the debt consolidation payment meets minimum legal requirements, the IRS must normally accept it. Since the Automatic Stay is in effect, the Service cannot bully taxpayers or force them to repay the money faster. Furthermore, in most cases, Section 362 of the Bankruptcy Code prohibits the IRS from adding penalties and interest to the unpaid amount during the repayment period. That’s a benefit that very few IRS repayment plans offer.
Discharge in a Chapter 7
As mentioned, unpaid taxes are priority unsecured debts which are dischargeable in certain circumstances. If your tax bill meets these conditions, Chapter 7 might be a better choice. This form of bankruptcy eliminates dischargeable debts in as little as six months. The tax discharge rules are:
- Income Tax: Only income taxes are dischargeable in bankruptcy. This forgiveness option does not apply to past-due trust taxes, property taxes, or anything else.
- Three Years: The tax debt must be at least three years old. Bear in mind that Tax Day is not always April 15. The IRS has been known to contest discharge because the taxes at issue were a few days’ shy of three years old.
- Two Years: Fraudulent tax debts are not dischargeable, just like fraudulent debts in general are not dischargeable. The IRS is usually the exclusive judge of what constitutes fraud and what constitutes unintentional error.
- 240 Days: If the IRS has assessed (calculated) the debt within the last eight months, the obligation is not dischargeable. Usually, a tax transcript shows assessment dates.
“Discharge” means a judge eliminates the legal obligation to repay a debt. But the debt itself, along with any collateral consequences remains. So for example, if the IRS filed a lien before the taxpayer filed bankruptcy, an attorney must deal with the lien separately.
Talk to Dedicated Cook County Lawyers
Bankruptcy either eliminates taxes or helps you pay them on your own terms. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. We routinely handle matters in Illinois and Indiana.
Resource:
nytimes.com/2021/04/13/business/irs-tax-gap.html
