Getting rid of personal income tax debt in bankruptcy
The best thing is to consult your tax man for an individual case. However, these are the general guidelines if someone has accumulated income tax debts. Again, an income tax debt can be discharged in bankruptcy if 5 conditions exist:
1. The taxes were due at least three years ago: The three years start from the date of filing which is normally April 15 of each year.
2. The taxes were from a return filed at least two years ago: the focus here is the actual filing date, not the due date. This is one good reason to file your tax return if you haven’t done so already.
3. The taxes were assessed at least 240 days: Basically, most tax assessments occur when you file a return. However, if you have had an audit or IRS proposed assessment which has become final, that is your assessment date.
4. The tax return was not fraudulent: Any fraudulent taxes cannot be discharged like any other fraud.
5. You are not guilty of tax evasion: You need to contest and you have good grounds to contest. The tax assessed were erroneous.
However, all of the requirements must be met in order to get rid of the debt. It is good to always consult a knowledgeable attorney.
Certain taxes, such as property taxes, excise taxes and customs duties, can be wiped out if they meet these conditions and are old enough (different time requirements for different taxes). If you owe these types of taxes, you should consult a bankruptcy attorney to discuss what timeframes apply to your specific tax liability.
Small business owners – payroll taxes and sales taxes
Any taxes which are to be withheld (such as payroll tax) or collected (such as sales tax) cannot be wiped out in bankruptcy. While these taxes are generally incurred at the corporate level, owners and corporate officers can be personally liable for these taxes.
– If you are a small business owner, you are very likely going to be personally liable for sales taxes and payroll taxes, and bankruptcy cannot remove your liability for these taxes! These facts mean you should prioritize paying them ahead of all other creditors.
– If you have taxes which cannot be wiped out in bankruptcy, you should explore all options. While these options include negotiating with the IRS (e.g., offer in compromise, payment plan, uncollectible status, etc.), they also include bankruptcy.
In Chapter 13 bankruptcy, you can stop interest and penalties on back taxes and pay them down over a three to five year payment plan. While this means paying the taxes, it may be your best option for dealing with them. This is especially true if you have other debts which can be wiped out in bankruptcy because Chapter 13 will let you pay down back taxes prior to paying anything toward debts which can be wiped out in bankruptcy (i.e., credit cards, medical bills, etc.). This often will reduce the amount these other creditors will get , which may be nothing after you pay your taxes.