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Bankruptcy for Tax Debt: Can Back Taxes Be Discharged in Los Angeles?
Personal income tax debt is dischargeable in some bankruptcies provided several requirements are met.
February 01, 2012 /HomeFamily PR News/ -- Most people associate bankruptcy with credit card, loan and mortgage debt. What they may not realize is that bankruptcy can also be used to eliminate liability for unpaid taxes. The U.S. Bankruptcy Code permits discharge of certain back taxes, but several conditions apply.
This article provides an overview of the rules governing the discharge of tax debt, however it is best to consult an experienced bankruptcy attorney to discuss your unique situation and whether you are eligible to obtain IRS tax relief through bankruptcy.
Discharge of Taxes in Bankruptcy
There are two kinds of tax debt, either business or personal. Generally, most business taxes are not dischargeable. The dischargeability of business taxes, which include sales and payroll taxes, depends on what classification they fall under.
In California, any business taxes that are considered "trust fund taxes", which includes taxes that have been withheld by a business on behalf of another individual for the taxing authorities, are non-dischargeable in bankruptcy. Typically these are most of the sales or payroll taxes. "Excise taxes" on the other hand, which are taxes collected for the benefit of being allowed to conduct business in a state, are dischargeable. Certain "non-trust fund" payroll taxes may be dischargeable as well.
Most individuals considering bankruptcy are looking for relief from personal income tax liability. People who qualify for tax discharge typically do so by filing either a Chapter 7 or Chapter 13 bankruptcy. To discharge tax debt, the following conditions must be met:
Taxes Due Must Be at Least Three Years Old
First, the back taxes must have been due at least three years before the individual filed for bankruptcy. For example, if an individual filed for bankruptcy on August 19, 2011, only taxes that were due before April 15, 2008, could be discharged. If an extension was filed for the taxes due in 2008, then the taxes would not be dischargeable until October 15, 2011. Any taxes owed in the three years before filing for bankruptcy may not be discharged. Personal income taxes for a particular year are usually due on April 15 of the following year, but certain holidays or other events may extend the deadline, so when the taxes became due depends on the facts of each case.
Tax Return Must Be Filed at Least Two Years Before Filing for Bankruptcy
Second, the individual must have actually filed the late tax return at least two years before he or she filed for bankruptcy. For example, if the taxes were due for 2003 but the tax return was filed in February, 2010, the individual's taxes could not be discharged in bankruptcy unless he or she waits to file for bankruptcy until February, 2012 or later. In contrast, if the tax return for 2003's taxes was filed in August, 2009 or earlier, an individual filing for bankruptcy in 2011 may be able to have his or her back taxes discharged. This is because the individual did not file for bankruptcy within two years of filing the tax return.
Taxes Must Be Assessed More than 240 Days Before Filing for Bankruptcy
Third, the taxes must have been assessed against the individual at least 240 days before he or she filed for bankruptcy. Basically, assessed means that the IRS made a notation that the individual owes taxes, as clarified in a 2010 bankruptcy court case. According to the American Law Reports, the 240-day assessment requirement is usually an issue when an individual has been audited or if additional assessments were made.
No Taxpayer Misconduct
Fourth, an individual's taxes may not be discharged in bankruptcy if the back taxes resulted from taxpayer misconduct such as filing a fraudulent tax return or tax evasion. Misconduct also applies to taxpayers who failed to file a tax return altogether and never got around to filing it.
The IRS will object to a discharge if the taxpayer never got around to filing their taxes. If the taxing entity files taxes on a taxpayer's behalf, this does not absolve the taxpayer of their duty to file their own taxes. No discharge is available to taxpayers who did not file taxes on their own.
No Tax Liens
Finally, even though an individual's back taxes may be discharged in bankruptcy, they may still face difficulties with the IRS or state taxing authority if the taxing entities placed a tax lien on their assets. If a tax lien has been secured, even if the individual's back taxes are discharged, the IRS later may be able to enforce the lien against his or her assets like real estate or a retirement plan.
Sometimes the IRS will remove their tax lien if the individual's tax debts are discharged in a bankruptcy and the taxpayer does not really have any significant personal possessions. If, however, the individual does have some assets of value, such as real estate with equity, the IRS will generally keep the lien in place.
Deadlines May Be Extended
One of the reasons it is important to consult with an experienced local bankruptcy attorney when trying to determine if a tax debt is dischargeable is because certain events can stop or even reset the clock governing tax dischargeability.
Filing either an appeal of an audit, an offer in compromise or an action in U.S. tax court each may cause the three-year, two-year and 240-day requirements to be extended, putting consumers at risk of filing for bankruptcy too early when those requirements are not yet met.
Bankruptcy for Non-Dischargeable Tax Debt
Even if tax liabilities are not dischargeable, bankruptcy can still offer some relief. You can use a Chapter 13 bankruptcy to pay off non-dischargeable taxes over a period of three to five years while controlling the penalties and interest. Chapter 13 bankruptcy can be used to pay both personal and business tax debts.
Because it can be difficult to determine if a back tax can be discharged in a bankruptcy, anyone seeking IRS tax relief or other debt management through Chapter 7 or Chapter 13 bankruptcy should consider seeking the advice of a Los Angeles bankruptcy attorney.
Article provided by Simon & Resnik LLP
Visit us at www.simonresnik.com
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