Tax Relief

Is Tax Relief Possible?

One question I’m asked regularly is about back taxes and tax relief.

“Can I discharge taxes in a bankruptcy?”

And the answer is “Absolutely. ”

But there are some rules that apply.

Some taxes can never go away. If you are an employer and you owe payroll tax or sales tax, they don’t go away. The presumption is that you collected them and you didn’t pay them, so you will have to pay it no matter what.

But income tax is dischargeable in bankruptcy. You can get rid of it in Chapter 7 or Chapter 13.  But three rules have to be satisfied.

1.   Three year rule. The tax return was  last due at least 3 years ago.  So if you got an extension for 2009, that means the taxes were due October 15, 2010.  If you want to discharge those taxes for 2009, you have to wait until October 16, 2013 to discharge it.

2.    Two year rule is that you have to have filed a tax return at least two years ago.

3.    240 day rule (8 months). If you have been audited and reassessed, we have to wait 240 days in order to discharge the tax in bankruptcy.

All three rules must be satisfied in order to discharge taxes in bankruptcy in Chapter 7.

When I say discharged, it’s just like your credit card. It goes away entirely.

In Chapter 13, it means you treat it like a credit card, too, and you end up paying a couple of pennies on the dollar. Now the difference in a Chapter 13 is that if you have taxes that are more recent, you can pay those without interest. They are not dischargeable, but you get 3 to 5 years to pay them without interest.

If the taxes survive in a Chapter 7, you have to work out a payment plan.

Most people (and even many bankruptcy attorneys) are surprised to learn that some taxes can be discharged in a bankruptcy proceeding. The rules are stringent and the timing is critical; we look at every case very carefully. But in essence, if an income tax return was last due at least three years ago, and the return was actually filed at least two years ago and there has been no new assessment in the last 240 days, the tax can be discharged in bankruptcy. This does not mean that tax liens go away; that is a separate matter.

If you have tax issues, make sure your attorney is experienced and knows how to properly address them, because if it is done incorrectly or at the wrong time, it usually cannot be fixed.

I encourage you to come talk to us. We will get a transcript from the IRS so we know for certain exactly what the dates are and we can go forward from there. Tax relief may be able to happen for you.