Ask The Get Out of Debt Experts Tax Related

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”

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

Jim 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 the author

Jim Buttonnow

Jim Buttonow, CPA/CITP, practices in the area of IRS and State tax controversy. He has more than 29 years of experience in IRS practice and procedure. Reach Jim at [email protected] or through his website www.buttonowcpa.com

4 Comments

  • Hi. First I want to say to you how I appreciate how you didn’t have a condescending attitude towards us. That truly means the world to us. On a personal note; I am in law enforcement and have been for 21 years. The cost of living here is astronomical and getting worse. I will look into Damon Day, this week.
    Again, thank you for your information and tone.

    • I feel your debt doesn’t define you. You can be an awesome person with horrible debt. You are always welcome here. BTW, I was just on the phone with Damon and gave him the 30,000 foot overview about your question.

  • Hi. My husband and I owe taxes before 2014. Added to that is that we haven’t filed taxes since 2014 (scared). Added to that I have been going tax deferred during that time just to survive (Bay area (California), we could not make it if I wasn’t. My husband has been a stay at home father since 2009 when we had our second son, we also had a daughter a year later.
    Currently we have three children, circa $45-$50,000 in tax debt, and $65,000 or more in just debt.
    We are filing our back taxes in December, and looking into filing BK in January or February.
    What are my options? Can my taxes be included in our BK? an can I qualify for “offer in compromise”?

    Thank you
    Anesha

    • You can discharge taxes in BK but the timeline of when it is possible runs from when you actually filed your taxes. This is why it is far better to file tax returns on a timely basis even if you can’t pay them. I can certainly understand the fear and stress of this issue for sure. You’ve got a couple of different issues. The first is it appears you may not be able to stay in the area you live in because your income, with taxes properly paid, can’t maintain it. The second is to get help with a strategy in dealing with the taxes. I would suggest you may want to consider speaking to a local tax professional or maybe even my friend and debt coach Damon Day – https://damonday.com

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