Using Bankruptcy to Deal with Tax Problems
If you have incurred tax liabilities and the IRS has either garnished your wages or threatened to levy your assets, you may have considered bankruptcy as a way to deal with the problem. A bankruptcy filing can help you manage tax arrearages, but there are specific restrictions.
Important first steps.
First, you need to assemble all your returns for which money is owed. If you have not filed any returns, now is the time to get them prepared and file them, even if you do not have the money to pay. You should have the advice of a qualified accountant or tax adviser.
If you do not have the returns, you or your tax adviser can request a tax transcript.
Take note if any state or federal tax liens have been filed. Federal tax liens are generally filed in the county where you live. In New Jersey, tax liens are called “debt certificates” and are docketed as judgments.
Using Chapter 7 to Address Tax Liabilities
Typically, a Chapter 7 liquidation proceeding is not the best way to resolve a tax liability. Most tax debts are simply not dischargeable in a Chapter 7 proceeding. To be discharged in a Chapter 7 case, a tax obligation must be:
- Income based — you cannot discharge unpaid sales taxes, excise taxes, or taxes for money you collected from employee payroll but did not pay over to the taxing authority.
- For a return that was last due at least three years ago and for which you actually filed a return no later than two years ago.
- For a tax that was assessed at least 240 days ago
- For a debt that was not incurred through fraud or willful evasion.
This is a simplified discussion. The rules and their application are more complex. Some taxes and most tax penalties can be discharged.
Because of the difficulty of discharging most tax debt, the practical effect of filing a Chapter 7 petition is that it will get you relief while the Chapter 7 case is in process, but the taxes and interest (but not most penalties) will immediately become due again once the Chapter 7 is complete.
Using Chapter 13 to Manage Tax Debt
With a Chapter 13 filing, you will be entitled to the automatic stay, which applies to tax obligations. You will then propose a plan that must provide for full repayment over a period of up to five years of all “priority” tax obligations. As long as you make your payments as agreed, the tax authority may not seek to accelerate the amount due or attempt to collect more than you have agreed to pay.
Dealing with IRS or state tax liens
Often, the IRS or state taxing authorities will have filed tax liens. Unless paid or otherwise dealt with, these liens remain after bankruptcy, allowing collection of any otherwise unpaid balance out of income or property. In a Chapter 13 case, it may be possible to “cram down” these liens to the actual value of all your property.
Any way you look at it, tax problems are serious business. While we are not qualified tax attorneys or tax advisers, we can help you use and apply bankruptcy, in conjunction with your accountant or tax adviser.*
Contact Neuner & Ventura, LLP
At Neuner & Ventura, LLP, we provide a free initial consultation to every client. We do, however, reserve the right to charge a fee to review any work done by another attorney. To set up a meeting, call Neuner & Ventura at (856) 596-2828 or send us an e-mail. Evening and weekend appointments are available upon request.
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*IRS CIRCULAR 230 DISCLOSURE: Pursuant to Treasury Regulations, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used or relied upon by you or any other person, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax advice addressed herein.