There are many types of taxes imposed on people and companies. Some of these taxes are never dischargeable in bankruptcy, and others may be. For example, a tax that you have collected on behalf of someone else is never dischargeable.
So sales taxes which you collect on the sale of an item is paid by the buyer. You collect it on behalf of the government. If you do not pay it, it cannot be discharged in bankruptcy. Not only is the company who collected the sales tax liable for the tax, but anyone who has check signing ability on the company’s bank account will also be personally liable. Employee taxes is another example of a tax which cannot be discharged in bankruptcy. Taxes which an employer is supposed to withhold from an employee to pay the employees taxes, must be paid to the government. Just as sales taxes make all those with check signing ability liable for the debt, the same is true for (941 taxes) withholding taxes. The good news is that if you do file for bankruptcy, although these debts cannot be wiped out by the filing of the bankruptcy, if a Chapter 13 bankruptcy is filed, all penalties would be discharged and all interest incurred on the debt stops on the day that you file for bankruptcy. If you file and others who are liable on the debt do not, the interest and penalties continue on the debt that has not been paid. These people will get the benefit of the principle being paid during the bankruptcy, but interest and penalties will continue to accrue for them.
Income taxes are a different story. This is a very complicated area of bankruptcy law which is still evolving. As a general rule, a tax which was due more than three years prior to the filing of the bankruptcy and has been assessed by the IRS more than 240 days (eight months) prior to the filing of the bankruptcy, is normally dischargeable. There are some things which can change the ability to discharge those debts in bankruptcy, but that is simply the general rule. If the IRS has filed a lien, the debt which would normally be dischargeable, would now be non-dischargeable up to the value of your assets. So if you have equity in your house or a retirement, the IRS is secured up to the value of the equity in those things. One of the evolving questions regarding dischargeability of IRS debt is what if you file a tax return late. We already know that if you file a late return within two years prior to the filing of the bankruptcy and the other factors for dischargeability are met, that debt may be dischargeable. The United States Supreme Court has ruled that if you file a late filed return and all of the above factors are met, but the IRS has filed a tax return for you, then you can never file a late filed return. Therefore if you file a late filed return, but the IRS has already filed a return for you, that tax debt can never be dischargeable. The remaining question that the United States Supreme Court has not resolved is whether a late filed return where the IRS has not filed a return for you allows the taxes to be dischargeable. Right now, those taxes are dischargeable. At some point though, the IRS will be filing appeals through the Federal Courts all the way to the Supreme Court. The way the Supreme Court is constructed now, I would expect them to say that any late filed return is non-dischargeable. The lesson to learn from this is even if you don’t have the money to pay the IRS, file your income tax return timely. If you have moved to Florida from another state which has income taxes, the same rules apply with regard to dischargeability.
If you have any tax which you owe, bankruptcy is a great way to free yourself from that debt. In a Chapter 13 bankruptcy, you will be able to repay the taxing authority without any collection activity on their behalf. They cannot garnish your wages, or your retirement or levy against any of your property. You will be repaying them back with no interest unless there is a tax lien on your assets. The lien applies to all real property located in the county where the lien was recorded, and all personal property worldwide. So if you own property in Broward county, but own a house with one million dollars in equity, the lien does not attach to that property. If you own property jointly with your spouse or anyone else, the lien will attach to your interest in the equity in that property. So if your house has $50,000.00 in equity and you own it jointly with a family member, the lien will attach to the $25,000.00 in equity that is yours. When you file the bankruptcy, you can repay that debt with interest. Right now the interest rate on secured IRS debt is 4%. You can take up to five years to repay the debt.
All of the above is true no matter what type of tax you have. A determination must be made whether the tax is dischargeable. Before you see a bankruptcy attorney, you should call the IRS at 1-800-829-1040 and ask them specifically for a coded transcript. It must be coded because that transcript shows what the IRS has done, and when they have done it. Without that coded transcript, there is no way for a bankruptcy lawyer to make a determination whether your income tax is dischargeable or not. So as long as you can afford to repay the taxing authorities over five years through a bankruptcy, bankruptcy is the best, easiest and cheapest way to repay the IRS the money that you owe them. Remember, a Chapter 13 bankruptcy doesn’t just deal with just one financial issue. It deals with all of the financial issues you may have. So if you have credit card debt, alimony or child support that you are behind on, or if you have a vehicle that has a very high monthly payment, Chapter 13 bankruptcy is a great alternative to consolidate all of your debt into a reasonable and affordable payment.
