Are Back Taxes Dischargeable in Bankruptcy?
One of many bankruptcy myths is that back taxes can’t be discharged in bankruptcy. The truth is, many types of taxes, interest and penalties are dischargeable in both chapter 7 and chapter 13 bankruptcy cases. The attorneys at Beutler Law Offices have helped Utah Families discharge millions of dollars in taxes in thousands of bankruptcy cases. But determining the type of taxes that are dischargeable is complicated and requires an experienced attorney.
If you owe taxes and need help determining if they are dischargeable, call 801-872-4882 24/7 to discuss your case and schedule a free consultation.
Three basic ground rules determine when a tax is dischargeable in a bankruptcy:
- The taxes are older than 3 years from the time they were due. (For example, 2012 taxes are due April 15th, 2013, so April 15th 2016 is 3 years from that date).
- The taxes were assessed more than 240 days ago. (taxes are usually assessed within 180 days from the time your tax return is filed).
- The underlying tax return was filed on time. (Or by the extension deadline if one was granted).
Many bankruptcy attorneys won’t take the time or have the expertise to analyze how a bankruptcy will affect your taxes, so if you owe taxes and are considering filing bankruptcy make sure you consult with an attorney who is knowledgeable and will take the time to thoroughly review your case.
Are Tax Liens Dischargeable in Bankruptcy?
Tax liens are created when the IRS or Utah State Tax Commission file a lien with the county in which you live, or file a lien in district court against you. This lien is typically a blanket lien over all personal property, and attaches to anything you own. Some liens are created wrongfully, and a taxpayer can request a release of the lien. For valid tax liens that are properly secured, filing bankruptcy may discharge any personal liability from a tax lien, but the lien may continue to exist even after a bankruptcy is over. In other words, there are times the tax debt itself is discharged, but the actual lien survives. Some debtors are able to negotiate a release of tax liens after a chapter 7 bankruptcy for a small amount of the overall debt. In a chapter 13, the other option is to propose a plan to pay the tax liens over a 3-5 year period and obtain a release of the lien. The interest rate is usually low and between 2-3% depending on the type of lien and debtors are able to keep all of their property and obtain a release of the lien upon completing the bankruptcy.
Does a Bankruptcy Stop IRS Garnishment, Tax Levy, or Lien during a Bankruptcy?
Yes, either type of bankruptcy will immediately stop the IRS and USTC from any further collections. Taxing authorities are bound by the automatic stay which protects debtors from levies, garnishments, or additional liens. If you are receiving collection notices from the IRS or Utah State Tax Commission, call the experienced attorneys at Beutler Law Offices for a free consultation.
Does a Bankruptcy Reduce IRS and Utah State Taxes?
Yes. Most taxes accrue at 3% compounded monthly for the late pay penalty, and an additional 3% compounded per month for a late file penalty. This is as much as 6% compounding monthly to a taxpayer’s bill! So late taxes can increase from $10,000 to $20,000 over just a few short years with all the interest and penalties tacked on. And even when you’re on an installment payment plan, all that interest keeps running and adding up, which is why many taxpayers find themselves treading water when making payments and never really making much progress paying down back taxes.
Fortunately, a chapter 13 bankruptcy can help discharge at least a portion of the taxes and penalties, and allow a debtor to pay back taxes over a 3-5-year plan with 0% interest. For this reason it is often far better to repay back taxes within a chapter 13 bankruptcy plan than to simply pay back the IRS or state direct monthly installments.
Can Creditors Intercept My Tax Refund If I File For Bankruptcy?
The IRS, State Taxing Authority, and state creditors such as ORS are not permitted to intercept a tax refund during the pendency of a bankruptcy. Bankruptcy creates an automatic stay as to virtually all creditors. There are at times however turnover requirements to a bankruptcy trustee if you receive a refund during your case, and it is important to consult with an experienced bankruptcy attorney to determine how much of your tax refund you will be able to keep if you choose to file a bankruptcy. There are many strategies you can follow before you file for bankruptcy which allow you to keep all of your tax refund and spend it on your own personal needs.
To learn more about your options with discharging back taxes in a bankruptcy, call or text 24/7 attorney Jesse Beutler and the staff at Beutler Law Offices at 801-872-4882 to discuss your case and schedule a free consultation.