No matter how you fill out your W-4 or how much money you set aside for taxes, you may end up owing the federal or state government. This is tough enough for people that are not enduring financial stress. It is perhaps impossible for people considering bankruptcy. There are many types of debt that you can eliminate through bankruptcy and there are some which you cannot. There is secured debt and unsecured debt. At any rate, debt is debt and it does not go away unless it is dealt with.
Debt that can be discharged through bankruptcy
Before we discuss tax debt specifically, let’s go over the kinds of debt that CAN be discharged during chapter 7 bankruptcy. Unsecured debts include:
- Credit cards (including fees);
- Accounts in collections;
- Medical bills;
- Late or past utility bills;
- Personal loans;
- Bounced checks unless they were intentionally fraudulent;
- Balances on assets in repossession;
- Vehicle accident claims unless the bankruptcy filer was driving while intoxicated;
- Debts generated through business as a sole proprietor;
- Past rent and other lease generated debt including vehicles; and/or
- Social security overpayments (other overpayments include veterans assistance and loans);
So, tax debt
Anytime you owe the government money, it is a serious situation. Make no mistake about it, if you owe the government, they will get the money one way or another. However, if you are in tax debt, you may be able to discharge the debt if you meet all of the following requirements:
- You filed a tax return, and the debt is from the three years preceding the bankruptcy;
- The taxes are income taxes;
- You have not committed fraud, or you did not try to evade taxes; and
- The income tax debt has to have been evaluated in the 240 days preceding the bankruptcy filing;
The good news is the aforementioned tax debt is dischargeable. The bad news is, not ALL tax debt is dischargeable through bankruptcy.
Tax debt you cannot discharge during bankruptcy
It is important to note that you cannot discharge a past tax lien. So, if in the past you have had tax debt and the IRS used that debt to put a lien on your assets, you have to resolve that lien during the bankruptcy (in many cases) by using your assets to offset the lien.
You cannot discharge tax debt from returns that have not been filed. In other words, hiding from tax debt by not filing and thus proving your debt, will not save you.
You cannot discharge tax debt from a trust fund. Lastly, you cannot discharge taxes withheld by your employer.
There are a lot of ways to get into tax debt, but you may not have the legal savvy to get yourself out. The federal and state tax code is very complex and rigid. If you find yourself in a position where you are considering bankruptcy and you are in tax debt, you need the skills and experience of a licensed attorney. Dsouza and Strachan Legal Group has the knowledge and experience you need. Contact Dsouza and Strachan today for a free consultation.