There is an age-old saying – the two things in life that are guaranteed are death and taxes. Surprisingly, when tax law intersects with bankruptcy law, some taxes may actually be dischargeable in bankruptcy. Understanding taxes and how they are handled in bankruptcy can be complex. If you are considering bankruptcy, you will want to make sure you educate yourself about IRS law and bankruptcy law. Not thoroughly understanding how the laws work can be detrimental to a bankruptcy and your tax burden. An Atlanta IRS law attorney can assist you.
Chapter 7 bankruptcy and dischargeable taxes
Chapter 7 bankruptcy is often called liquidation bankruptcy. In order to file Chapter 7, you must qualify under the means test. The means test compares your household income to an average for your household size and state of residence. If you qualify for Chapter 7, it can be an effective way to handle older IRS and Georgia state tax debt. Newer income taxes, usually three years or newer, is considered priority debt and cannot be discharged. But, IRS tax debt can be discharged (including some penalties and interest) in bankruptcy if:
- The tax returns you want to discharge were due at least 3 years prior to your bankruptcy file date. This must also include any tax extensions.
- You must have actually filed a tax return for each year of debt you want to discharge 2 years before your bankruptcy file date.
- Each tax return (and related debt) has not been assessed by the IRS or was not assessed in the 270 days before your bankruptcy case is filed.
- Your tax returns were not fraudulent, including tax fraud or evasion.
Types of taxes that cannot be discharged in bankruptcy
As a matter of public policy, there are some types of taxes that cannot be discharged in bankruptcy. These include:
- Recent income taxes-This is usually tax debt that does not meet the criteria above and the returns that have been filed in the last 3 years
- Tax penalties, depending on when assessed
- Any tax debt associated with fraud
- Tax debts related to unfiled returns
- Payroll taxes, including withholding taxes or trust fund taxes
Chapter 13 bankruptcy and taxes
Chapter 13 bankruptcy is for individuals that do not qualify for Chapter 7 or need to enter a repayment plan under the protection of the bankruptcy court for other reasons. Chapter 13 can be effective in handling nondischargeable types of tax debt. It allows you to pay the taxes under the protection of the bankruptcy court (i.e. the IRS cannot sue or garnish) for a period of up to 60 months. It also limits the interest and penalties.
Bankruptcy, IRS Law, and tax liens
Chapter 7 bankruptcy can be an effective tool in eliminating tax debt. However, a bankruptcy discharge only eliminates your personal liability for the debt. However, if the IRS has already put a tax lien on your property, the lien remains. Essentially, the bankruptcy prevents the IRS from collecting on the debt through wage garnishment or taking tax refunds. But, if you sell property which has a tax lien, the IRS gets paid when you sell the property. The IRS lien trumps the bankruptcy discharge. After bankruptcy, it is possible to try and work with the IRS to negotiate a lien settlement. An experienced Atlanta IRS law attorney can assist with lien settlements.
Contact an Atlanta Attorney to Understand IRS Law and Bankruptcy
Tax matters and bankruptcy are complicated. Contact Jeff Cohen Attorney At Law today at 404-814-0000 to understand how to handle IRS law matters before or after your bankruptcy.