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Wednesday, November 12th, 2008

by Theodore Sliwinski, Esq.

Tax Problems and Bankruptcy

If you have IRS Tax problems, a federal tax lien, tax levy, IRS wage garnishment, or any other tax problems, then you should immediately contact the New Jersey Bankruptcy Center for a free bankruptcy consultation. At this meeting, the Center will help you determine how you can effectively deal with your taxes in a bankruptcy. Bankruptcy and taxes can be a very complicated subject to understand. We can explain your legal options to solve your tax problems in bankruptcy. Whether you are eligible to file for chapter 7  completely eliminate your personal income tax liability, or instead you for chapter 13 to repay your taxes over 3 to 5 years, filing for bankruptcy can be your best option to deal with IRS tax liability.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, has imposed limits to a taxpayer’s ability to discharge certain taxes in a chapter 13. Therefore, it is important for anyone facing tax problems to consult an experienced bankruptcy attorney.

Many New Jersey-ites who owe taxes may seriously consider filing for bankruptcy to  wipe out or reduce their tax debt liability. Many types of taxes can be discharged in  bankruptcy. However, not all types of tax debt can be discharged. The crucial issue is  what type of taxes are owed and when the taxes came due. Often times, many New Jersey-ites, including some tax professionals, are under the mistaken impression that federal income tax liabilities are not dischargeable in bankruptcy. Fortunately, for many tax debtors this presumption is wrong. While the rules on discharging taxes in bankruptcy can be quite complicated, filing for bankruptcy may be an excellent way to stop IRS collection actions, wage garnishments, levies on bank accounts, and liens on property.

Taxes and bankruptcy often involve many complicated questions of law. Whether or not you can wipe out your taxes in a bankruptcy depends on the facts of your particular case. The discharge in bankruptcy provides that certain taxes are dischargeable only under specific conditions. In order to determine the dischargeability of taxes in a bankruptcy, it requires a thorough understanding of many different areas of law, which includes the bankruptcy code, the Internal Revenue Code or “Federal Tax Code.” There have been entire books written on the subject of discharging tax debt in bankruptcy. Therefore, the laws, rules, and regulations on the dischargeability of tax debt can’t be fully explained in this article. However, there are some general principles that apply in most cases that involve  posslbly discharging tax debt. Every tax debt scenario, and should be evaluated on a case by case basis by an experienced New Jersey bankruptcy attorney.

When a person files for bankruptcy, and if he has tax liability to the IRS or to any other taxing authority, then the filing of the bankruptcy case automatically stops or “stays” all of collection actions of those taxes. Filing for bankruptcy will stop IRS collection actions, including, IRS seizures of property, IRS wage garnishments, IRS bank account levies, federal tax liens, and lawsuits in Tax Court proceedings. The automatic stay of will stop any legal actions by the IRS and bring the issues into the forum of the bankruptcy court.

There are several requirements that must be satisfied to discharge taxes in bankruptcy. The following conditions are as follows:

a. A tax return(s) must have actually been filed for the delinquent tax liability owed;

b. At least 240 days have passed since the IRS assessed and determined what you owe;

c. The taxes must have been filed two years before you file a bankruptcy petition; and

d. The taxes must have been due at least 3 years before the filing of the bankruptcy petition. Or in other words, they became due three years prior to filing your bankruptcy.

Whether personal income tax liability is dischargeable is mainly based on certain time frames, or the lapse of specific time frames from a tax return’s due date, the specific filing date of the return, the actual assessment date of the tax, and then to the date of the bankruptcy filing. This may appear complicated but discharging personal income tax liability in bankruptcy usually comes down to time frames.

If you are aware of any of the above dates and believe your personal income taxes are dischargeable in a bankruptcy, then it is always a good idea to obtain a copy of your IRS transcripts just to be certain. You can get a copy of your tax transcripts directly from the Internal Revenue Service.

Even in scenarios wherein you meet with the time frames above, then there other criteria may prevent you from wiping out your tax debt in a bankruptcy. You first need to make certain that you are eligible to file for bankruptcy and satisfy the bankruptcy means test. If you have determined you are eligibility for a chapter 7,  or if your are eligible for a chapter 13, then your tax debt still might not be dischargeable if the Internal Revenue Service can prove you willfully tried to evade the tax or fraudulently filed your tax return. Tax fraud, hiding assets, and tax evasion can make income tax liability non-dischargeable.