Many individuals and businesses consider filing for bankruptcy to try to get back on the right financial track. This consideration often comes with many questions specific to the types of debt that are owed. Specific to back taxes that are owed, filing for bankruptcy can offer benefits, including stopping the IRS from continuing with collection efforts, and in some cases, clearing your federal and California tax debt entirely. If you are thinking of filing bankruptcy because of tax debts, it is crucial to speak with an experienced tax attorney like those at the Tax Law Offices of David W. Klasing before filing. We can help you understand what effects bankruptcy will have on your tax debts and whether it is the right choice in your situation. If we believe bankruptcy is not the right choice for you, we can help you find a reasonable collection alternative.
Bankruptcy itself is a legal process that enables the debtor to eliminate or reduce various personal or business debts, including medical debt and credit card debt, in addition to some types of tax debt. Whether your tax debts will be cleared if you file for bankruptcy depends on multiple factors and the particulars of your situation. The following four elements will be most important in determining how bankruptcy affects your tax debt.
The type of bankruptcy for which you file will have a significant influence on whether or not you have a chance of discharging any tax debt. You should always contact an experienced tax attorney like those at the Tax Law Offices of David W. Klasing before you choose where and how to file. Of the two major types of bankruptcy, Chapter 13 and Chapter 7 bankruptcy, only Chapter 7 typically gives you the possibility of clearing some of your tax debt if you meet the other qualifications described below. With Chapter 13 bankruptcy, you will be required to reorganize and start a payment plan for “primary debts,” including most tax debts. Means testing can unfortunately convert a 7 to a 13 automatically.
You next must ask whether the type of tax debt you have is dischargeable by bankruptcy in the first place. The only kind of debt that can be discharged is income tax debt. Debt owed for payroll taxes, FICA taxes, and trust fund taxes, among other types, are not dischargeable through any type of bankruptcy proceeding, including Chapter 7.
If you willfully filed a fraudulent or misleading tax return or willfully did not file necessary supplemental forms like FBARs, you will not be eligible to have your debt reduced or eliminated through bankruptcy proceedings. Furthermore, any fraud penalty assessed by the IRS cannot be discharged through bankruptcy. Examples of willful conduct include deliberately not reporting or underreporting income and claiming tax deductions for which you know that you are not eligible. If you falsely certify that your conduct was non-willful when it was, in fact, willful, you could open yourself up to additional severe charges and penalties.
Both of these issues have to do with time limits on what tax debts can be eliminated through bankruptcy. First and foremost, the tax return related to the debt in question must have been due at least three years before your bankruptcy filing, including any extensions you requested. Second, you must have filed the pertinent tax return at least two years before filing for bankruptcy. Finally, the IRS must not have assessed the debt against you within 240 days of your filing. Two hundred forty days adds up to a little less than eight months.
As you can see from the above, you are only able to clear your debt with the IRS through bankruptcy under a narrow set of conditions. As such, you must consult with an experienced tax professional such as the lawyers and CPAs at the Tax Law Offices of David W. Klasing before making any decisions. We can help you understand the complex consequences a bankruptcy filing may have, and if it is likely to help or hurt you in the long run with regard to your tax debt. If we believe bankruptcy could help, we can help you choose the right type and file the proper forms in the right venues.
If filing for bankruptcy does not make sense based on your tax situation, we can help you explore other ways that you may be able to be brought back into compliance with the IRS, such as getting on a more reasonable payment plan. Our lawyers can work to make sure the situation does not get any worse and to mitigate any damage caused by willful behavior that could lead to criminal penalties. Call us today at (800) 681-1295 to set up a consultation.
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Regardless of your business or individual tax needs, the professionals at the Tax Law Offices of David W. Klasing are here for you. We are open for business and our team will help ensure that your business is too. Contact the Law Offices of David W. Klasing today to discuss your business with one of our professionals.
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