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Back Taxes

What are taxes that can be dealt with in bankruptcy?

There are numerous kinds of taxes.  Property taxes, income taxes, 941 (employee) taxes, sales taxes.  Let’s take these taxes one by one.

Property taxes are non- dischargeable in bankruptcy, meaning they cannot be wiped out.  If you want to keep your house, these taxes must be repaid.  Outside of bankruptcy, if you don’t pay your real estate taxes within three years, a tax certificate will be sold.  Shortly thereafter, a tax deed will be issued, and the buyer will own the property.  If a bankruptcy is filed before the tax deed is issued, the taxes can be repaid through a Chapter 13 bankruptcy.  You must pay the taxes back with interest, but that interest amount may be minimal.  Many times, the purchaser of the tax certificate will buy the tax certificate at 0.25% interest So, if you are paying back the certificate holder, you must pay it back with interest at the bid amount. 

Income taxes (State or Federal) may be dischargeable under certain circumstances.  This is a very complicated area of the law which cannot be explained in full in this blog.  But, the bankruptcy law is very clear about certain income taxes which are dischargeable.  There are three main requirements:

  1. The income tax must be at least three years old prior to the filing of the bankruptcy.  So if you filed your 2016 income taxes on April 15, 2017, they would first be able to be dischargeable on April 16, 2020.
  2. The income tax must have been assessed by the IRS more than 240 days prior to the filing of the bankruptcy; and
  3. The IRS must not have filed a lien.  If a lien is filed, this debt becomes secured on all property, whether exempt or not.  The rest of that debt would be dischargeable.

When the IRS assesses your tax return, that means that they look at your return, and if it’s correct, that’s the assessment date. 

The case law is still emerging on dischargeability  of income taxes.  If you file your return late, it still may be dischargeable after two years from the time it was filed unless the IRS has filed an income tax return for you.  If the IRS has filed an income tax return for any year before you get the chance to file a return, that year’s tax can never be discharged.  Therefore, it is always a good idea to file your income tax returns timely even if you don’t have the money to pay the IRS.  We still do not know if late filed returns are going to be dischargeable in the future.  The United States Supreme Court has only ruled that income taxes are not dischargeable if your return is filed late and the IRS files a return before you do.  The outstanding issue is whether an income tax is dischargeable if you file late and the IRS does not file an income tax return for you first.  Right now, the answer is that the tax is dischargeable.

941 (employee) taxes

941 taxes are taxes that you withhold for your employee when you pay them.  Anyone who has check signing ability  on the accounts that pay the employees are liable for the 941 taxes personally.  It is very important that you don’t put family members on the account, because even though they don’t write checks, they would still be liable for 941 taxes.  When you file for Chapter 13 bankruptcy, you can repay the IRS with no interest, and any penalties would be wiped out.  You have up to five years to repay the debt to the IRS in a Chapter 13 bankruptcy.  While you are in bankruptcy, the other people who are liable on the debt would still be liable for the accruing interest and penalties. 

Sales taxes

Sales taxes are another tax which is non-dischargeable. As we all know, sales taxes are collected by a business when something is sold.  When you file for bankruptcy, the interest and penalties stop accruing, and the penalties that have accrued will be wiped out.  Interest and penalties on taxes are very high.  The best way to repay sales taxes that are owed is to file Chapter 13 bankruptcy which can deal with paying them back fully over time.  You can work out a deal with the State of Florida Department of Revenue outside of bankruptcy, but any deal made will not allow you to pay the sales taxes back without interest or penalties. 

Sales taxes and 941 taxes are taxes that you collected from other people to pay the Florida Department of Revenue and the IRS, but didn’t.  Those taxes will never be forgiven.  Property taxes are secured by your home.  It’s like a mortgage, and it is actually first in line to get paid.  Therefore, property taxes can never be discharged. 

If there is no equity in the house, meaning you will get no proceeds from the sale, you can get an Order from the Bankruptcy Court authorizing the sale without paying the IRS.  If there was no equity in the property when your Chapter 13 bankruptcy was filed, a motion to value can be filed, and the lien can be wiped out.  If there is equity in the property, and while you are in the Chapter 13 bankruptcy the value of that property increases, you get to keep the increase in equity in the property.

This is a difficult question to answer.  If the business has to stay open, if a Chapter 13 bankruptcy is filed, you will be able to continue to operate.  The bankruptcy code does not allow a creditor, even the State of Florida or the US Government to prohibit you from making income to pay back your debts.  However, because your company is not in bankruptcy, once your Chapter 13 bankruptcy is over, the interest and penalties which have been accruing while you were in Chapter 13 bankruptcy, are still a liability for your company.  There are ways to get around that liability, but that will have to be a discussion for each individual who comes in for a free consultation.

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