Only death and taxes are certain. Income tax debt can be hard to deal with in bankruptcy because the Bankruptcy Code limits your ability to cancel income taxes. Your Case Depends on Many Variables:
Whether or not income taxes (federal or state) may be cancelled in either a Chapter 7 or Chapter 13 case depend on a lot of variables like:
- Did you file an income tax return for the tax period in question?
- Did you file your return late or on time?
- If you did not file a return, did the IRS for a substitute return for you?
- How long ago was the return filed?
- How old is the tax period in question?
- Has the I.R.S. “assessed” the taxes yet?
- How long ago were the taxes “assessed”?
- Has the I.R.S. filed notice of a tax lien what is the value of your property/assets?
- Have you filed a bankruptcy before?
- Have you received an offer in compromise before?
- Have you requested a due process hearing or appeal from the I.R.S?
- Did you file an extension to file your return?
- Are you subject to a tax audit?
All these variables need to be considered to figure out whether your tax liability for any particular tax period may or may not be cancelled or reduced.
Hard to Get the Information from I.R.S. and S. C. Department of Revenue
Getting all the required information (listed above) from the I.R.S. is not easy either. For the last year or two, you should be able to get the information directly from the I.R.S yourself if you try. But for older years, the I.R.S. needs to be contracted directly through the Transcript Delivery System by your attorney or a tax professional.
Can a Bankruptcy Cancel or Reduce My Income Tax Liability? – Maybe
In some situations, bankruptcy can wipe out income tax debt. In others, it can’t. The rules for bankruptcy and taxes are strict and complex. Therefore, it is critical to enlist the help of an experienced bankruptcy attorney to help you navigate your options.
Generally, you may be able to cancel income tax debt if certain conditions are met.
- The income tax liability must be MORE than three years old,
- The income tax return must be filed MORE than two years ago,
- The income tax liability must have been assessed MORE than 240 days ago, AND
- The I.R.S / S.C. Dept. or Revenue must NOT have filed a notice of tax lien.
Tax Liens & Bankruptcy
Tax DEBT and tax LIENS are two different things. Tax debt is money that you owe the State of South Carolina or the IRS. A tax lien is a filing by the I.R.S. or S.C. Dept or Revenue that operates against your property (land and personal property like cars, boats, guns, jewelry – basically anything and everything that belongs to you) to secure your tax liability that you owe the state or federal government. Bankruptcy cases do NOT cancel tax liens. Tax liens only go away if they are paid or if they expire after 10 years (unless they are renewed).
However, if notice of an income tax lien was filed before you filed for bankruptcy, a Chapter 13 bankruptcy may allow you to either pay that lien back in FULL over 3 to 5 years or may allow you to pay back LESS than the full amount of the tax lien depending on how much all your property is worth.
Determining What Is Right For You
It is too hard to try to figure out what to do with income tax debt or liens by yourself. An experienced local bankruptcy lawyer can help you determine your options and help you make a good decision.
David Gaffney is offering a FREE consultation so that you can thoroughly understand your options. I will personally take your call to explain the bankruptcy process and costs so you can make an informed decision for your future. You are not hiring me with this call. You are simply learning more about your options. Our discussion will be fully confidential.