That old saying about death and taxes has stuck around for so long because it is almost impossible to make tax debts go away except by paying them. In so many other contexts, it is possible to make financial obligations appear out of thin air and disappear again simply by running one’s mouth; this is what the insurance write-off, the business negotiation, and the lump sum debt settlement with a collection agency have in common. This is not the case with tax debts. It knows how much your employer paid you and how much of its share of that amount it has yet to receive, and it will not let you forget it until you pay.
Much like the preschooler who reminds you every day that one time last summer, you handed him a juice box with the straw facing left instead of facing right and that you had better not do it again, the IRS is not quick to forgive. It may come as a surprise, then, that in some circumstances, the IRS will forgive your oldest tax debts when you file for bankruptcy protection, but becoming eligible for the discharge of your tax debts takes a lot of planning and preparation. If tax debts are a major contributor to your financial stress, contact a Monmouth County bankruptcy lawyer before you file for bankruptcy to maximize the chances that the IRS will discharge as much of your tax debt as possible.
You Should Have a Difficult Conversation With Your Tax Accountant Before Filing for Bankruptcy
The main difference between Chapter 7 bankruptcy and Chapter 13 bankruptcy is that, with Chapter 7, eligible debts get discharged almost immediately. In contrast, in the case of Chapter 13, those debts only get discharged after you comply with a court-ordered payment plan. The Chapter 13 payment can last anywhere from 36 months to 60 months. As for which debts the bankruptcy court discharges, the answer is yes for consumer debts such as credit card debt, unsecured personal loans, and medical bills. The answer is no for federal student loans (under most circumstances), court-ordered fines, alimony, and child support, no matter how long ago you incurred those debts.
Regarding debts owed to the IRS, the answer is maybe. The IRS does not take kindly to people making excuses to avoid paying taxes. (Its least favorite excuses are, “It was a business expense,” “I found this cash on the subway platform,” and variations on these.) Even if you cannot pay your tax debts, it is important to file your tax returns; the IRS will not forgive any tax debts, and the court might even reject your bankruptcy filing if you have any missing tax returns. Before your bankruptcy filing, you should make sure you have filed all your tax returns over the past four years. This means that, even if your finances are such a mess that you have not filed taxes in years, you should meet with your accountant and hash out the unpleasant details. It may be painful to see the numbers on your tax returns, but once you submit your bankruptcy filing, things can only get better.
Chapter 7 Bankruptcy and Your Tax Debts
Chapter 7 bankruptcy requires the bankruptcy court to determine which assets belonging to the filer the court can liquidate to satisfy the filer’s debts. (Not all Chapter 7 bankruptcy cases require you to liquidate assets; necessities like a primary residence and one vehicle are exempt, and many filers do not own any non-exempt assets.) If the court accepts your filing, the IRS may discharge tax debts that are more than three years old, provided that you filed the relevant tax returns on time. How much tax debt it discharges depends on the individual circumstances of your case. In order to determine whether tax debt is dischargeable in bankruptcy, I first order your tax transcripts from the IRS. Then, I do the legal research before filing your case to see if, and when, your taxes can be dischargeable in bankruptcy.
Chapter 13 Bankruptcy and Your Tax Debts
Chapter 13 bankruptcy requires you to make monthly payments to the bankruptcy court for several years to settle your eligible debts; at the end of the payment plan, the creditors discharge your remaining debt. If you successfully comply with your Chapter 13 payment plan, then at the end, the IRS will discharge tax debts that are more than three years old, provided that you filed the relevant tax returns on time. Again, detailed legal analysis of your tax transcripts and the applicable statutes is required to determine if, and when, your taxes can be dischargeable in bankruptcy.
Contact a New Jersey Bankruptcy Lawyer
Jonathan Goldsmith Cohen has helped thousands of clients settle or discharge tax debts or discharge other debts to free up money to satisfy obligations to the IRS. Contact Jonathan Goldsmith Cohen to discuss your case.