Tax Motivated Bankruptcy
If you are consumed with back taxes, obtain experienced legal counsel prior to considering a tax motivated bankruptcy. I am David W. Klasing, an experienced tax attorney and CPA. My legal team and I are committed to helping business owners and professionals obtain a fresh start when consumed with back taxes.
During an initial consultation, we will evaluate your situation to help you determine the most effective way to get your finances back on track, such as:
- Paying any back taxes
- Working out a payment plan
- Making an offer in compromise
- Filing Chapter 7, Chapter 13 or Chapter 11 bankruptcy
Discharging debt through bankruptcy is often misunderstood. Not only can certain tax debts be wiped away, but filing bankruptcy can also stop IRS collection efforts. This is a highly complicated area of this law. Whether you are consumed with income taxes, payroll taxes or sale taxes, entrust my law firm to evaluate your situation and determine if filing for bankruptcy is the right solution. Contact my law firm today to schedule a consultation with a highly skilled Orange County bankruptcy tax lawyer at my law office in Los Angeles or Irvine, California.
Put an Experienced Tax Debt Bankruptcy Attorney to Work in Your Case
If you are faced with a tax lien, you are likely worried about losing your hard-earned assets. My legal team and I have the skills and experience level to help you navigate through the bankruptcy system, while negotiating to have any tax liens removed.
Before becoming a tax attorney, I worked for nine years as an auditor in public accounting. I then gained a master’s degree in taxation and became a Certified Public Accountant (CPA). I work directly with tax attorney John A. Harbin, who is particularly skilled in tax bankruptcy. He has handled more than 500 tax-motivated bankruptcies in federal tax court, district bankruptcy courts, and before the state of California Administrative Appeals Board. As a legal team, we have the skills and experience level to help you determine if filing for Chapter 7, Chapter 13 or Chapter 11 bankruptcy is the right solution for you.
Benefits of Gaining a Fresh Start Through Filing for Bankruptcy
Pursuing debt relief through filing for bankruptcy provides taxpayers with several benefits, such as:
- Stops the IRS from collecting back taxes starting the day bankruptcy was filed
- Discharges eligibles tax debt and any penalties or interests associated with the back taxes
- Wipes away other dischargeable debts, allowing taxpayers to pay off other tax debts that were not discharged
- Allows taxpayers to establish a repayment plan to pay off their principal tax debt
Before obtaining tax relief through filing for bankruptcy, you must prove that your last four tax returns have been filed with the IRS. Our firm can expertly prepare any delinquent returns for you. My legal team and I are committed to preserving your financial interests, while guiding you through the bankruptcy process. To get started, we will need to evaluate your financial statements, balance sheets, income statement and tax returns.
Does Filing for Bankruptcy Get Rid of Tax Debt?
Bankruptcy is a complex subject with implications for virtually every imaginable aspect of business and personal financial planning, such as credit scoring, homeownership, loan eligibility, and of course, debt. Unfortunately, while most taxpayers realize that the chief purpose of bankruptcy is to help alleviate business or consumer debt, few people appreciate the potential benefits of bankruptcy when it comes to relieving tax debt. To help our readers gain a better understanding of how tax debts may be affected by filing for bankruptcy in California, our bankruptcy tax attorneys present this simple “Q&A.” In it, we discuss some critical bankruptcy tax issues for debtors (and their representatives) to be aware of, such as the three-year, two-year, and 240-day rules for discharging income tax debt.
What Are Some Common Bankruptcy Terms I Should Know?
Before we begin, it’s important to clarify a few terms that are frequently used in discussions of bankruptcy:
- Creditor – A party to whom the debtor owes payment, such as a lender or the IRS
- Debtor – The party filing for bankruptcy
- Dischargeable Debts – Debts that may be wiped out by the bankruptcy
- Non-Dischargeable Debts – Debts that may not be relieved by bankruptcy
- Trustee – The party appointed to oversee the debtor’s bankruptcy case
What is Bankruptcy?
Bankruptcy is a legal process that enables the debtor to eliminate or reduce various personal or business debts. To accomplish this successfully, the debtor must file certain documents (such as the bankruptcy petition and supporting schedules), adhere to federal bankruptcy requirements (such as the requirement to undergo credit counseling), and, depending on which type of bankruptcy is being filed, follow a long-term repayment or “reorganization” plan.
While bankruptcy procedures are primarily governed by federal laws, there are some variations from state to state, such as variations in which bankruptcy “exemptions” are available to help the debtor protect assets. The bankruptcy laws we follow today stem from a major legislative overhaul that occurred in 2005, when Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).
Are There Different Types of Bankruptcy?
Yes. Each type of bankruptcy is known as a bankruptcy “chapter.” Most bankruptcy cases in California, and throughout the U.S. generally, involve one of the following chapters:
- Chapter 7 Bankruptcy – Chapter 7 is also called “liquidation” or “straight” bankruptcy. Chapter 7 is the fastest, simplest, and most popular form of bankruptcy. In Chapter 7, the debtor’s assets may be sold (“liquidated”) by the bankruptcy trustee, though assets can often be protected using exemptions. The resulting sale proceeds are used to help repay the debtor’s creditors. The timeline for a typical Chapter 7 case is approximately four months.
- Chapter 13 Bankruptcy – Chapter 13 is also called “reorganization” or a “wage earner’s plan.” In Chapter 13 bankruptcy, the debtor enters a reorganization plan, which lasts from three to five years, depending on the case. During this period, the debtor makes regular payments to the trustee, who then distributes the funds to the debtor’s creditors as appropriate. Once the plan has been completed successfully, the remaining dischargeable debts may be wiped out by the bankruptcy court.
- Chapter 11 Bankruptcy – Chapter 11 is also called “reorganization,” not to be confused with Chapter 13. While both individuals and businesses can potentially file for Chapter 11, due to the associated cost and complexity, this type of bankruptcy is seldom used in comparison to the aforementioned chapters. (For context, bankruptcy statistics from the U.S. Bankruptcy Court for the Central District of California show that 27,574 Chapter 7 cases were opened in 2017, compared to 9,299 Chapter 13 cases – and just 361 Chapter 11 cases.) Similar to Chapter 13, Chapter 11 requires the debtor to complete a repayment plan in order to obtain a discharge.
While there are several other kinds of bankruptcy, these are utilized only under narrow circumstances that do not apply to most debtors. These lesser-known forms of bankruptcy include Chapter 9 (which is aimed at municipalities), Chapter 12 (which is aimed at farmers and fishermen), Chapter 15 (which is aimed at foreign debtors), and “Chapter 20” (a term for filing Chapter 7 and Chapter 13 in succession).
Can I Get Rid of Tax Debts by Filing for Bankruptcy?
Bankruptcy has the power to relieve the debtor of liability for numerous dischargeable debts, including two of the largest sources of debt in many American households: credit card and medical bills. In addition to medical and credit card debt, other dischargeable debts in bankruptcy generally include past-due utilities, past-due rent, business debts, certain court judgments, and – under narrow circumstances – student loans meeting certain criteria (the “Brunner Test”).
Less straightforward is the issue of whether tax debts are dischargeable in bankruptcy. The short answer is that it depends on the circumstances, particularly with regard to four factors:
- The type of tax debt is in question
- Which type of bankruptcy the debtor is filing for
- The timing of the bankruptcy filing in relation to the pertinent tax return
- Whether the debtor engaged in tax fraud (i.e. tax evasion)
Type of Tax Debt
First, let us address the widely-held misconception that tax debts are non-dischargeable. In reality, this does not necessarily apply to state or federal income taxes owed by the debtor. That being said, other types of tax debts generally cannot be discharged, such as debts connected to sales or payroll taxes (“FICA taxes,” “trust fund taxes”).
Type of Bankruptcy
In Chapter 13, the debtor is responsible for repaying all “priority” debts, which, as the name suggests, are debts whose repayment receives “priority” under federal bankruptcy laws. Examples of priority debts include child support-related debts, alimony-related debts, and “priority tax debts.” Most tax debts are considered “priority,” including payroll, excise, and employment tax debts, in addition to more recent income tax debts.
For this reason, some taxpayers may prefer to file Chapter 7 – which, though risking potential liquidation of assets, does not require the debtor to enter a reorganization plan. Unfortunately, there is a common misconception that high-earning taxpayers cannot qualify for Chapter 7 bankruptcy. This is likely due to the fact that, under the BAPCPA, debtors who wish to file Chapter 7 must pass a “Means Test” comparing their incomes against the applicable median: an effort by the BAPCPA to curb abuse of bankruptcy laws.
The reality is that even high-earning debtors can potentially utilize Chapter 7 by filing a non-consumer case, which does not require means testing. It may be possible to file a non-consumer case if more than half of the debtor’s debts are deemed non-consumer. Significantly, taxes are categorized as non-consumer debts.
Timing of Filing and Age of Tax Debt
As our IRS tax debt attorneys noted above, tax debts are generally treated as non-dischargeable (and, in Chapter 13 cases, must typically be repaid). However, some exceptions can arise around income taxes, depending on when the tax in question was due:
- Three-Year Rule – The pertinent tax return must have been due a minimum of three years prior to the bankruptcy filing date. This includes any tax filing extensions the debtor might have obtained.
- Two-Year Rule – The debtor must have filed the pertinent tax return a minimum of two years before filing for bankruptcy.
- 240-Day Rule – The IRS must not have assessed the debt within the 240 days preceding the debtor’s bankruptcy. (For context, 240 days is slightly less than eight months.) Keep in mind that some events can extend this window of time, such as the debtor making an offer in compromise (OIC).
Due to these timeframes, more recent income taxes may be impossible to wipe out through bankruptcy. However, older income tax obligations that meet these criteria could be eligible for discharge.
Tax Fraud Issues
Debtors should be forewarned that income tax debts cannot be discharged if the associated returns were in any way fraudulent. Unfiled returns, delinquent returns, underreported income, and the improper claiming of tax credits are some common examples of tax fraud indicators, or “badges of fraud,” that can signal willful tax evasion to the IRS.
Of course, encountering a problem when filing for bankruptcy should be the least of a debtor’s legal concerns if he or she has truly engaged in tax fraud. Tax evasion is a federal crime, meaning the debtor could be at risk of prosecution. In addition to criminal penalties that include prison time, high fines, and often, periods of supervised release, tax evasion can also trigger a hefty civil fraud penalty – to say nothing of any IRS restitution that may be ordered by the court.
Those contemplating an eventual bankruptcy that have a history of committing tax fraud might consider first going through a domestic / offshore voluntary disclosure to get all prior years properly assessed and then enter an eventual properly timed (aged) bankruptcy but this approach cannot be guaranteed in light of the admission of tax fraud that takes place in a voluntary disclosure. This issue is likely to arise in (or following) a high-risk / high-stakes divorce. Taxpayer’s with a history of non-filing may be tempted to file all delinquent returns, get them properly assessed and properly aged and then enter a properly timed (aged) bankruptcy but this approach cannot be guaranteed as well. Be sure to seek a consultation with a competent criminal tax defense counsel if you are in either of these scenarios.
Get IRS Debt Help from an Experienced Bankruptcy Tax Attorney (Chapter 7, 13, 11)
The takeaway message here is that it may be possible to discharge income tax debts that meet specific criteria. However, if you file for Chapter 13, you must be financially prepared to pay off other tax (and non-tax) debts over the life of your reorganization plan. If you file for Chapter 7, you will not be required to enter a reorganization plan but may risk losing some of your assets to liquidation. An experienced tax attorney can help you make the decision that’s right for you or your business, and work with you to determine the most advantageous time for filing.
At the Tax Law Office of David W. Klasing, our tax resolution lawyers have more than 20 years of combined experience helping taxpayers and business entities obtain relief from state and federal tax debt. We can help you evaluate whether filing for tax motivated bankruptcy is a practical option, and if not, help you explore alternative options for tax debt relief.
We work with taxpayers throughout the state of California, in addition to foreign and out-of-state taxpayers. If you have a question about tax-related bankruptcy, contact us online for a confidential, reduced-rate consultation, or call the Tax Law Office of David W. Klasing at (800) 681-1295.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland and Sacramento.
Note: If you have concerns about the privacy of our initial or subsequent communication and are unable to easily travel to our Irvine / Orange County Main Office, consider scheduling a GoToMeeting to safely and securely establish an initial or maintain an existing attorney client relationship. With end-to-end encryption, strong passwords and top-rated reliability, no one is messing with your meeting. To schedule a reduced rate initial consultation via GoToMeeting follow this link. Call our office and request a GoToMeeting if you are an existing client. We are generally happy to travel to any of our appointment only satellite offices for a subsequent meeting in appropriate circumstances once a relationship is established via a signed engagement letter and the payment of an initial retainer or where enough retainer is available where a current client to cover the reasonable travel time and time required for the meeting.
Will it cost me more to hire the Tax Law Offices of David W. Klasing, who’s main office and the vast majority of the firm’s staff is located in Irvine California, but an appointment only Satellite office is close to my location, as opposed to a local company? Absolutely not! See our policies that address this issue here: