Taxes and bankruptcy is a complicated subject. There are multi-volume book sets written on the issue. Still, there are some general rules that a blog post can cover.
First of all, you have to determine what kind of taxes you owe. Personal income taxes, business withholding taxes, sales taxes, property taxes; they are all treated differently.
The most common case is personal income taxes. In order to determine whether or not your personal income taxes are dischargeable, your attorney will need to know four things.
- When the returns were due, that includes lots of things, but the big one is whether or not you filed for an extension;
- When the return was actually filed, and that means received by the IRS not just put in the mail;
- When any taxes were officially assessed by the IRS, and this includes any assessments following audits or revisions to the return;
- Finally, your attorney will need to know if you have filed a Bankruptcy or made an Offer in Compromise since the time the taxes were incurred.
In order to be absolutely sure about these dates your attorney will probably require a tax transcript that includes all of this information.
The general rule is that personal income taxes become dischargeable in Bankruptcy once the returns have been due for at least three years, the returns have been on file for at least two years and the taxes have been assessed for at least 240 days. These rules make certain assumptions — the returns were not fraudulent, the taxpayer has not made any attempts at tax evasion, etc.
Then, of course, there are the exceptions; and there are way too many exceptions to go into them here. Although one exception that is developing rapidly (and not in a good way) is the effect of a late filed return on the ability to discharge taxes. This is an area where you just have to talk to an attorney, and again this is an area where a tax transcript is invaluable.
You should never assume that taxes will (or won’t) be dischargeable until you have actually talked to an attorney and probably gotten transcripts for the appropriate years. Still, in most cases where these three rules are met, the taxpayer may file for bankruptcy and discharge his personal liability for the taxes. That filing will not avoid any tax liens that have attached to property prior to the filing, but it will stop liens from attaching to after-acquired property and it will stop the IRS from attempting to collect from you personally.
It is not uncommon for people to come see me who have many years of past-due taxes owed. In some cases those taxes add up to hundreds of thousands of dollars. In many cases they have been making payments for years and have done so without realizing that unless otherwise indicated the IRS will apply payments to the oldest outstanding tax year. In many cases a Bankruptcy filing will not discharge all of their taxes, but it can convert an unmanageable debt into a manageable one.
So, if you have more tax debt than you can pay, don’t discount the possibility of contacting a bankruptcy attorney. Do mention when making the appointment the amount of taxes in play. Not all attorneys are comfortable filing cases with large amounts of tax debt. So, don’t be surprised if the first attorney you contact refers you to someone else. Also, don’t expect to get completely out of trouble; but you may be very surprised at what a bankruptcy can do for you.
Oh, and if you remember one thing from all of this, file your tax returns ON TIME. If you can’t pay, you can’t pay; but file your returns ON TIME. Extensions are fine, just file before the end of the extension period. Returns not filed timely can create a problem you can’t change.