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Can I Get Rid of Back Taxes in My Chapter 7 Bankruptcy? – Jacquelyn

“Dear Jim,

I am converting from chapter 13 to a chapter 7 and I have owed federal taxes in it they will work with me on it won’t they?

Will they work with me to pay back my taxes?

Jacquelyn”

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The Answer

Dear Jacquelyn,

Thanks for the question. Although bankruptcy is filed in federal US Bankruptcy Court, state laws still apply (means testing, exempt property, etc.). Hence, you should always consult a reputable local bankruptcy attorney who has experience with the IRS as a creditor in bankruptcy.

In Chapter 7, the status of a claim for taxes depends on several factors:

  • whether a notice of lien has been filed before bankruptcy (if the IRS has filed a priority lien, they may have priority interest in assets – see #5 below also)
  • how long before bankruptcy payment of the taxes was due (see my explanation in #1 and #2 below)
  • whether the claim is for tax, penalty, or interest; and (penalties are dischargeable unless the event that gave rise to the penalty occurred in the last 3 years and the penalty arises from taxes that are discharged in bankruptcy)
  • the type of tax (i.e., income, employment, or excise tax)- an example of taxes that are not dischargeable are withholding taxes (trust fund taxes)

Let me give you the general rules as it applies to INCOME TAX debt and bankruptcy. If your tax is from income tax (Form 1040) and is more than 3 years old, it may be dissolved in Chapter 7.

However, there are some things you may want to know:

  1. You must have all of your returns filed. Debt on unfiled returns will not be dischargeable (late filed returns have their own rules and generally there is problems with old years that have been filed within 240 days of the bankruptcy petition. There are also other technical rules for recently filed back returns that you will need to consider, if applicable.)
  2. The last three tax years generally are not discharged in bankruptcy
  3. Bankruptcy filing puts an automatic “stay on collections” from the IRS collecting on past due taxes
  4. Bankruptcy filing extends the time for the IRS to collect on your taxes for the duration of the bankruptcy proceedings, plus 6 months thereafter
  5. A tax lien may survive bankruptcy, especially when it relates to collecting on assets that were exempt from bankruptcy liquidation

You should gather all of your information related to your tax assessments (date of assessment, type of tax, tax return filing history, any unfiled returns) before you see your attorney so that you can speak specifically about the ability to discharge your taxes in bankruptcy. You can get this information by ordering all of your IRS account transcripts from the IRS directly. This will contain the information you need. Call the IRS at 1-800-829-1040 to get these documents. Again, I must stress the importance of a good bankruptcy attorney – you will not regret it.

Jacquelyn- please let us know how this goes and if I can be of further assistance.

Thanks

Jim

Can I Get Rid of Back Taxes in My Chapter 7 Bankruptcy?   JacquelynJim Buttonow is one of the resident debt experts here at GetOutOfDebt.org that helps people for free. Jim is a licensed CPA who spent 19 years with the IRS coordinating large compliance teams of IRS agents and specialized personnel. In the last 5 years, Jim has invented consumer and practitioner software and treatises on how to address many different tax issues. He has also represented many people before the IRS examination, collection, filing, and appeals functions. He currently assists taxpayers on an active pro bono tax practice aimed at serving people in need. He can be reached at IRSMind.com.

If you have a tax question you’d like to ask just use the online form. I’m happy to help you totally for free.

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About Jim Buttonnow

Jim Buttonnow
Jim Buttonow, CPA/CITP, is cofounder of Beyond415. He has more than 26 years of experience in IRS practice and procedure. Reach Jim at [email protected].

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