Taxes and tax debt is a common problem facing millions of Americans. Bankruptcy may be a solution. To understand taxes and bankruptcy, read on.
Chapter 7 or Chapter 13 bankruptcy is a great solution for people who are up to their eyeballs in debt because it can wipe out most, if not all general unsecured debt. General unsecured debt is debt that is secured only by your signature. Credit cards, pay day loans, medical and dental bills are typical unsecured debts. Secured debt is debt that is secured by collateral. You can give the collateral back and not owe anything, or, you can keep the collateral and pay for it. If you owe money on a car, home or refrigerator you bought at Best Buy – your creditor has a security interest in your collateral.
There are certain limitations to what Chapter 7 & Chapter 13 bankruptcy can discharge: student loans, back child support, spousal support, criminal fines (this includes parking tickets) and income taxes, generally speaking, are not dischargeable. So why even discuss discharging taxes Bankruptcy? Well, in law there are always exceptions – and back taxes happen to have their own tricky, narrow and often confusing exceptions. People with tax debt do have some hope.
Many people choose not to file their tax return because they already know that they will be unable to afford the balance due. It’s like not opening a bill because you are afraid to look at the balance, or because you can’t pay. This is a huge mistake, and I’ll explain why. First, the IRS charges penalties for both failure to file and for failure to pay. It’s simple and inexpensive to file. There is no reason why you should get hit with two penalties when you can minimize the damage with a little bit of effort.
Second, filing the return starts the clock ticking on the 10 year statute of limitations on collection of taxes due (26 USC § 6502) as well as the three year period in which the IRS can assess more taxes for the year in question (26 USC § 6501).
Last but not least, if you are looking to discharge any back tax debt for a particular year, the taxes must have been filed. There is no exception and this applies to both Chapter 7 and Chapter 13. It’s that simple. You don’t file, you don’t discharge. Period.
The FIVE rules of discharging taxes: If the income tax meets all five rules, then the tax debt is dischargeable in EITHER Chapter 7 or Chapter 13.
For example, if a tax was due from a 2005 tax return, the due date of that tax liability would be April 15, 2006. In this example, not including any extensions, you would have to wait until April 15, 2009 to file the bankruptcy in order to be eligible to discharge the IRS tax debt. Many times, you must be careful to wait the appropriate time period in order to ensure that the tax debt will be wiped out.
To Learn More About Taxes And If Bankruptcy May Help, please give us a call at 785-727-7700 for a FREE Consultation over the phone or in person or you can email us now.