When a person is struggling with debt, they may consider filing for Chapter 7 or Chapter 13 bankruptcy. Typically, they want to know what types of debts they will be able to discharge, or otherwise “wipe out”. For those who have unpaid back taxes, bankruptcy is an option to consider. Not all back taxes, however, may be discharged.
What Happens When You Don’t Pay Taxes?
When taxes aren’t paid, the IRS, subject to quarterly adjustments, charges three percent interest compounded daily until the tax is paid. Additionally, there is a failure-to-pay penalty of 0.5% of the tax owed for each month that the tax remains unpaid after the due date, with a maximum amount of 25%. As such, even a small amount of back taxes can result in very large amounts due as a result of interest and failure-to-pay penalty charges.
What Are the Conditions for Discharging Back Taxes?
Back taxes can only be discharged in Chapter 7 or Chapter 13 bankruptcy if certain conditions surrounding the back taxes are satisfied. These conditions are as follows:
* The taxes are from a tax return that was due three years or more prior to filing for bankruptcy;
* The returns were filed at least two years prior to filing for bankruptcy;
* The taxes were assessed more than 240 days prior to filing for bankruptcy;
* The tax returns were filed by you;
* The taxes were not unpaid as a result of willful evasion or fraud; and
* The taxes that were unpaid were income-based;
If the back taxes meet the above requirements, then they may be discharged, and if so, the federal government will no longer be able to hold you liable for the back taxes, or garnish wages or money within a bank account.
However, it is important to note that if the IRS has already filed a lien against your property, bankruptcy will not discharge a tax lien, even if back taxes are otherwise forgiven.
Postponing a Petition for Bankruptcy.
In some cases, a person who needs to file for bankruptcy and hopes to discharge back taxes may be advised to postpone filing a bankruptcy petition. This is because some taxes may not currently meet the requirements for discharge, but soon will.
Installment agreements with the IRS may also be negotiated, providing an individual struggling with debt with some relief before the taxes become eligible for discharge. Meeting with a bankruptcy attorney is strongly recommended to provide guidance regarding the best plan for filing for bankruptcy and having back taxes forgiven by the IRS.
Consult with a Bankruptcy Attorney.
If you’re struggling with debt, especially with back taxes, an attorney can be your best ally in understanding your financial options including how to file for bankruptcy and how to have your back taxes discharged.
The bankruptcy attorneys at Krigel & Krigel have experience on both sides of the table when it comes to bankruptcy and are a leading bankruptcy law firm in Kansas City. If you need help, contact them today!
*This article is very general in nature and does not constitute legal advice. Readers with legal questions should consult with an attorney prior to making any legal decisions.
In a legal situation that was daunting, confusing, and thoroughly stressful, the team at Krigel & Krigel was indispensable. The attorneys were knowledgeable, prompt, patient, and communicative. Always taking the time to walk me through the processes & what to expect in the next steps. I couldn’t recommend a better group of professionals.