– we had about 10 questions about tax bankruptcies, this week alone. Who knows, perhaps this article re-surfaced
Is it true that you really can get rid of your taxes through bankruptcy?
What is a tax bankruptcy and how can I get one?
About three years ago, I wrote an article about how bankruptcy is sometimes the only answer.
In it, I didn’t really address what happens when you owe so much in taxes that you can’t possibly ever pay it off. There IS a way out.
YOU CAN’T BANKRUPT TAXES – EVERYONE KNOWS THAT
About 13 years ago, I was at a dinner meeting for tax professionals. This former IRS collections officer was the speaker and he introduced the subject of tax bankruptcies. That was the first time any of us had heard of the concept.
This former IRS agent, Dexter Schuman said that even attorneys weren’t familiar with the concept. They’d fight him, refusing to believe this could be done. Schuman knew it could – because when he worked for IRS collecting debt from a particularly difficult taxpayer, it had been done to his case.
Well, more than a decade has passed since he introduced the concept to the tax professional community in Southern California. Oddly enough, although today, you hear commercials about this on television all the time – especially if you’re up late at night – many attorneys still don’t understand the concept – or know how to do it properly. So, if you decide to file for a tax bankruptcy, please made certain your bankruptcy attorney has experience discharging taxes.
If not, keep looking until you find someone who does. I am fighting a case today where California state taxes weren’t discharged by a Nevada attorney back in 1996-97. The balance today is over $80,000. You don’t want that to happen to you.
Let me explain how this works, OK?
NO SUCH THING AS TAX BANKRUPTCY
First of all, it’s true, there is no such thing as a tax bankruptcy. It’s just your regular, run-of-the mill Chapter 7 filing.
However, if your tax debt fits a certain profile, you are allowed to discharge it.
Here are the conditions:
1) The tax return is for a year that is at least 3 years before you file for BK.
2) The tax return was filed more than two years before you file the bankruptcy petition.
3) The tax was assessed more than 240 days before you file the bankruptcy petition (this for audits, and additional assessments).
4) The tax didn’t result from a fraudulent tax return or tax evasion.
5) The tax was not secured against your property. In other words, no lien was filed.
6) The didn’t result from a trust fund penalty for unpaid employer’s payroll taxes.
TOLLING THE STATUTE
If you talk to a BK attorney who understands about taxes and bankruptcy, you’ll start hearing that phrase – tolling the statute.
It means that all those time-frames above (the 3 years, the 2 years, etc.) all have time added to them if you have ever filed for an appeal on an audit; or if you have ever filed for an offer in compromise (OIC); or a Tax Court petition… among other things.
Doing these things stops the clock and the time you spent in appeals or in OIC status or span of time from filing with the Tax Court until the case is settled – all of those stretches of time are added to the three years, two years, etc.
This is one of those computations that is very tricky. So, you’d prefer to err on the side of safety. If you’re not sure of dates – add several weeks extra before filing your bankruptcy.
Under no circumstances do this one alone.
WHAT ABOUT THE NEW BANKRUPTCY LAW?
Well, I didn’t see anything in there that eliminates your right to discharge taxes. So, that’s the good news.
The bad news is that you’re going to have to meet much more stringent income and repayment standards than in the past. In fact, most people won’t even qualify to file for a Chapter 7 bankruptcy if they have jobs and a stream of income.
You’ll find a really good flow chart here.
So, if you’re thinking that you might be a good candidate for a tax bankruptcy, do it as soon as you can. Once the new law takes effect on October 17, 2005, you may no longer qualify for Chapter 7 at all.
For more information on Tax Bankruptcies:
Eva Rosenberg, MBA, EA