Does Bankruptcy Clear Back Taxes?

The record-law audit rate, which is less than 1 percent for taxpayers earning more than $1 million a year, gives many people a false sense of security. This percentage only refers to the formal audit rate. Informal audits, which usually consist of a series of “Dear Taxpayer” letters, is higher than ever. The IRS is not only aggressive when it comes to collecting past-due taxes. It also has tools other debt collectors can only dream about.

Furthermore, Illinois taxpayers have the Illinois Department of Revenue to worry about. For the last several years, the Prairie State has gone through some well-chronicled budget problems. “Tax cheats” and people who abuse “tax loopholes” are easy targets for politicians and the bureaucrats who are under their control.

So, if you fall behind on estimated tax payments, the state and/or federal government will almost certainly target you for an informal audit. When that happens, a Chicago bankruptcy attorney can set you up on an income-based repayment plan which everyone qualifies for. Even better, in some cases, bankruptcy might completely eliminate past-due income taxes.

Discharge in a Chapter 7

Eventually, the taxman cometh. However, because taxing authorities have such limited resources, the process often takes much longer than it did a few years ago. Therefore, more taxpayers are usually eligible for discharge in a Chapter 7. The eligibility requirements in this area are rather straightforward and strictly enforced:

• Three Years: The income taxes, and only income taxes are dischargeable in bankruptcy, must be at least three years old. This requirement can be confusing. The IRS often changes the payment date. However, these changes might or might not affect the due date. On a related note, taxpayer-filed extensions usually only affect the payment date.
• Two Years: The returns at issue must have been on file for at least two years. Substitute returns that the IRS files on the taxpayer’s behalf do not count. Furthermore, the amount of tax in the return, as opposed to the amount of tax the IRS claims you owe, is usually dischargeable.
• Eight Months: Even if you meet the first two requirements, income taxes are not dischargeable if the IRS has assessed the debt in the last 240 days. Typically, before the IRS sends a letter that includes the total amount due, its accountants assess (calculate) the debt.

Furthermore, there must be no evidence of fraud. Omitting an income stream is usually fraud, as far as the IRS is concerned. Claiming an improper deduction could be considered fraud as well.

“Discharge” means the judge eliminates the legal obligation to repay the debt. However, the debt itself remains, as do any collateral consequences. So, if the IRS filed a lien before the taxpayer filed Chapter 7, a Chicago bankruptcy lawyer must address the lien separately.

Repayment in a Chapter 13

Certain repayment plans, such as installment payment plans, are available through the IRS. However, the taxing authority has the final say as to who qualifies for these plans, at least in most cases. Furthermore, the taxing authority may continue to charge penalties and interest on the unpaid balance during the repayment period.

Chapter 13 is different. Almost everyone qualifies for this form of relief. A debt ceiling applies, and all filers must complete two brief financial management classes. Significantly, the Automatic Stay might prohibit the IRS from charging penalties and interest during the protected repayment period.

This protected repayment period lasts up to five years. Chapter 13 debtors make a monthly debt consolidation payment. This payment’s amount is usually based on the debtor’s income. Furthermore, if there is any dispute as to the debtor’s eligibility or the amount owed, the judge usually refers such matters to mediation. During mediation, the taxing authority must make some compromises in order to reach an agreement.

Connect with Diligent Cook County Lawyers

If a taxing authority is demanding money, bankruptcy offers several ways out. 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:

irs.gov/statistics/compliance-presence