Does an Illinois Bankruptcy Take Care of Back Taxes?

Uber drivers and other gig workers fueled a dramatic rise in the number of freelance workers between 2014 and 2019. Many of these individuals are moonlighters, while others are full-time freelancers. All of them deal with significant income peaks and valleys, especially during these uncertain economic times. As a result, it is easy to fall behind on estimated tax payments or siphon estimated tax money off for other purposes.

Despite a spate of recent budget cuts, the IRS is still one of the largest government agencies. Furthermore, the Service has collection tools that private banks only dream about. So, if you are behind on your taxes, sooner or later, the taxman cometh. And, s/he can do things like place liens and garnish wages without even going to court.

One way or another, a Chicago bankruptcy lawyer helps people like you take care of their tax problems. One nice thing about bankruptcy is that almost everyone is eligible, and an independent body sets the few eligibility rules. Only some people are eligible for IRS repayment plans, and the Service sets the rules.

Discharge in a Chapter 7

Financially, back taxes are unsecured debts, like credit cards and medical bills. These obligations involve no security agreement or collateral. Unsecured debts like these are generally dischargeable in a Chapter 7 bankruptcy.

Legally, back taxes are priority unsecured debts in a consumer bankruptcy case. Therefore, these obligations are only dischargeable in certain situations. The rules for discharge (forgiveness) are:

• No Fraud: Fraudulent debts are never dischargeable in bankruptcy. But the fraud rule is a bit different regarding back taxes. Usually, “fraud” implies malice. That’s not true in this context. Significant income omissions or deduction overstatements could be considered fraudulent, even if they were unintentional.
• 240 Days: Back taxes are dischargeable if the taxing authority has not assessed the debt in the last 240 days. Assessment, or calculation, is an accounting activity which only a lawyer knows how to uncover. Generally, however, if you have not received a letter in the last eight months, the taxing authority has probably not assessed the debt.
• Two Years: The relevant returns must have been on file for at least two years prior to bankruptcy. The returns must be ones the taxpayer filed. Substitute returns, which the IRS prepares largely for accounting purposes, do not count.
• Three Years: Independently of the two year requirement, the relevant taxes must be at least three years old. Note that Tax Day is not always on April 15. And, in the past, the IRS has successfully challenged discharge because the taxes were a few days short of three years old.

A Chapter 7 judge can only discharge the obligation. The judge does not have the power to address the collateral consequences of tax debt or other debt. So, if the IRS filed a lien before the taxpayer filed Chapter 7, a Chicago bankruptcy lawyer must separately address that lien.

Repayment in a Chapter 13

If you do not qualify for a Chapter 7 tax discharge, you do not have to settle for whatever program the IRS or other state taxing authority offers. You can still take control of your own finances by filing Chapter 13. These debtors have up to five years to erase back taxes and other allowed claims using an income-based monthly debt consolidation payment.

The Automatic Stay usually remains in force for the entire protected repayment period. Outside bankruptcy, since the state or federal taxing authority sets the rules, the taxing authority can unilaterally cancel the repayment program and aggressively seek instant payment. But Section 362 of the Bankruptcy Code prevents such actions.

Incidentally, the Automatic Stay also applies iin a Chapter 7. So, while a bankruptcy judge determines debt dischargeability, the IRS must leave you alone. 

Connect with Diligent Lawyers

Bankruptcy gives taxpayers multiple ways to eliminate tax debt. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.

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