Many of us know that filing Chapter 7 bankruptcy can help erase credit card debt and medical bills. However, many Arizonans are still confused regarding how a bankruptcy filing might help discharge debts owed to the IRS or to the state of Arizona. Whether you can discharge tax debts in a Chapter 7 filing could depend on a number of factors. Some tax debts could be erased in bankruptcy while others cannot be discharged. You can wipe out income tax debts if they meet certain criteria.
What Tax Debts Can You Discharge?
Here are some of the requirements you must satisfy to be able to erase your tax debt in a Chapter 7 bankruptcy:
- You can discharge only taxes that are income-based through a Chapter 7 bankruptcy filing. This means that the tax debt must be for federal or state income taxes or taxes on gross receipts.
- The return on which you incurred the tax debt must have been filed or due at least three years before you file for bankruptcy. For example, if your taxes were disclosed in a 2015 income tax return for which the extensions to file the return expired on October 15, 2016, the tax return due date test will be satisfied only if the bankruptcy petition is filed after October 15, 2019.
- You must have filed the tax return at least two years before filing for bankruptcy. Most courts do not recognize a late return as a “return.” So, you may not be able to discharge the taxes.
- The taxing authority, be it state or federal, must have assessed the taxes against you at least 240 days before you filed for bankruptcy. This time limit may be extended if for example you had previously filed for bankruptcy.
- There should have been no tax fraud or willful evasion on your part. This could include filing false tax returns or trying to defraud the system in some other way. In such cases, your tax debts are not eligible to be discharged.
Which Tax Debts Cannot Be Discharged?
There are also a number of tax debts you cannot discharge in a Chapter 7. You cannot wipe out a tax lien, also known as secured taxes, which will remain attached to your property. However, this rule only applies to tax liens that were recorded against your property before you file for bankruptcy. What this essentially means is that even though you might now owe tax debt, you will have to pay the lien from any profits when you sell the property.
Another type of tax debt you cannot wipe out with a Chapter 7 is any property taxes you incur before you file for bankruptcy. Again, this only applies to property taxes last payable within one year of your bankruptcy filing. If the property tax were payable more than one year before your bankruptcy filing, you may be able to discharge that debt. However, several Arizona counties attach a lien to your property after the tax assessment. If you have a lien against your home for the property tax, for example, that lien will remain after your Chapter 7 discharge even if your personal liability has been removed. You will also owe taxes that a third party is required to collect. This includes taxes such as FICA, Medicare or income taxes that your employer withholds routinely from your pay. Some employment taxes, custom duties and excise taxes also may not be discharged after a Chapter 7.
How Does Chapter 13 Work for Tax Debt?
It is important to remember that for the most part, you cannot erase tax debts in Chapter 13 bankruptcy. What you do instead is repay your tax debts through the life of your Chapter 13 repayment plan – be it over three or five years. The amount of tax debt you must pay will depend on whether the tax debt is categorized as a “priority” or “nonpriority” claim.
You will be required to pay priority claims or secured debt in full through your plan. You will end up paying a part of your nonpriority or unsecured claim. Also, in Chapter 13 bankruptcy, your nonpriority tax debt is likely to be added to your other unsecured debt such as credit card debt or medical bills. This debt is paid through your Chapter 13 repayment plan after all secured claims are paid. It is very likely that you will pay a percentage of your total unsecured debt through the life of the plan.
What to Do if You Owe Taxes
It is more common than you think for people to owe taxes, but not have the money to pay. What do you do in such a situation? First step – don’t panic. Secondly, do not delay filing your tax return. You should do so on time to avoid tax penalties, even if you don’t make the payment that is due. The next step is to try and figure out how much of your tax debt you can afford to pay right now. You should pay as much as you can to minimize penalties because those penalties will be calculate based on how much you owe. Remember, a tax extension does not buy you more time to pay any taxes owed. All it does is extend the deadline to file your return.
If you get a tax bill from the IRS, you will save money if you pay as soon as possible. Use the IRS Direct Pay tool. You can also get a short-term extension (120 days or less) by applying for one online via the IRS website. Another option is to apply for a monthly payment plan. You may qualify for an online installment payment agreement as long as you owe $50,000 or less. Other options to consider are liquidating savings accounts, stocks or bonds to take care of your tax debt. You may be able to charge your tax debt on a credit card.
If you are facing a dead end and are at a loss for how to handle your tax debt, contact our experienced bankruptcy lawyer Arizona at the Pew Law Center. We will evaluate your case at absolutely no cost and help arrive at the best possible option for you. Please call us today to find out how we can help you.