Many debtors who file for bankruptcy think that they cannot pay income taxes in bankruptcy. However, that is not true. Income tax can be waived in bankruptcy. Of course, it’s not that simple to pay off your tax debt. Tax exemption depends on a variety of factors, and many debtors are not eligible to pay off their tax debts.
To understand how complicated it is to determine whether your tax debt is payable, consider that debt comes in three forms- secured (i.e. your mortgage), unsecured (i.e. your credit card bill), priority (i.e. child support and alimony). Now consider that taxes can be classified as all three – sometimes even in the case of the same debtor.
Guaranteed tax payables are debts filed by the IRS against debtors. The lien is attached to all the debtor’s property, so it is guaranteed. Priority tax payables are debts that the debtor cannot pay off in bankruptcy, but there is no lien. Unsecured tax debt is debt that must be repaid by the debtor.
So what determines whether income tax debt is eligible for exemption? There are six rules for taxing income, and the same applies to State and Federal income taxes. Taxes may be waived if all of the following conditions exist:
* The latest deadline for filing returns is more than three years. (Note: the three-year term is calculated from the last tax return due date for the tax year. An extension to file a return delays the start time, so don’t just assume you know the due date. Your 2006 return is due no earlier than April 15, 2007 If an extension is submitted, it could be due no later than October 17, 2007 (depending on weekend dates)).
* Tax Return has been submitted or given by the Taxpayer for the tax year concerned at least two years prior to the date of filing for bankruptcy.
* If the tax bill has been billed, it must be more than 240 days between the last assessment date and the filing of bankruptcy.
* The tax can be assessed, meaning that the debtor is not a non-reporter.
* SPT is not a fraud
* No intentional tax evasion by debtors
Therefore, a debtor must pay attention to these conditions before filing for bankruptcy. For example, a debtor may be able to pay his taxes if he waits another 35 days to file an application. It is thus recommended that if the debtor deems the tax payable, a tax account transcript is ordered from the IRS to verify the filing date, due date, and appraisal date.
It should be further noted that this blog is a very basic description of the rules related to the application of income tax and there are bound to be many complex questions that arise in the case of debtors. Some questions that may need to be answered by debtors include, but are not limited to:
* Will a compromised bid be detrimental to any of the time periods?
* What properties do IRS liens cover?
* Will the IRS waive tax liens on its own?
* How does the IRS file a tax return when the debtor is insolvent and has taxes that can be paid?