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I'm Thinking About Filing A Chapter 7 Proceeding, Can I Discharge My Income Tax Debt?
Practical insights from powerhouse attorney, author and speaker Bradley Bailyn.
Filing a liquidation, or Chapter 7 bankruptcy proceeding is a serious legal step that requires you to carefully consider the benefits and the downsides of doing so.
The best thing you can do for yourself is to contact a debtor-creditor attorney to explain the ins and outs of this proceeding, before you attempt to file a Chapter 7 bankruptcy proceeding, because there are many factors involved in determining what property of yours gets sold, what gets protected, and what debts can be discharged.
In this type of bankruptcy, you do not make a repayment plan, but you seek to discharge those debts that can be eliminated, and your non-exempt property is gathered together by the bankruptcy trustee, sold, and the proceeds used to pay off your eligible creditors. Taxes due get priority treatment in bankruptcy liquidations, and the proceeds available from the sale of your assets will be used to pay down what you owe.
One of the frequent questions that come up from someone looking to file a Chapter 7 is “Can I discharge my income taxes?”
As is usually the case in law, the answer is “It depends.”
First of all we are talking about income taxes. If for some reason you owe payroll taxes for example, those will not be dischargeable. (This would be in a case where you were doing business as an individual, and didn’t collect and pay payroll taxes from your employee’s gross income earnings).
So, once we are talking about your income taxes, there are certain criteria that must be met for your tax debt to be discharged in a Chapter 7 proceeding.
First, you must have filed a return for the taxes sought to be discharged, and that must have been filed at least two years prior to the filing of the petition. Second, the due date for the filing of the return must be at least three years prior to the filing of the bankruptcy proceeding. Third, the assessment of taxes due must be at least 240 days old prior to filing.
Additionally any taxes determined due by reason of fraud or tax evasion, are not dischargeable.
We need to take a look at these criteria in more detail.
Let’s say you filed an extension to file your taxes in a year that would otherwise be eligible for discharge. You got the extension, and you also lost the ability to discharge that particular year because of it.
For example, with respect to your 2014 tax return instead of filing in April 2015, you get an extension to file until October 2015. Those taxes are not going to be discharged if you file your bankruptcy petition in April 2018, and you’d have to wait until October 2018 to file if you wanted them discharged.
As to the filing of your income tax returns, be advised that taxes which become due for returns you didn’t file are not dischargeable. Let’s say you forgot to file your 2014 return. If and when it is determined that you owe taxes for that year, and that you didn’t file, besides all of the other legal problems you are going to have, you can’t discharge those taxes in bankruptcy.
As was mentioned above, the IRS must have assessed your taxes due at least 240 days prior to filing. But what if there was an audit of a return that would otherwise have been eligible, and the final assessment by the IRS is less than 240 days prior to the filing date?
Sorry, that cannot be discharged.
So let’s say you get those taxes discharged. You’re home free right?
No. Tax liens are not dischargeable.
That means if you have any real estate left after your discharge, (for example you kept the house because your equity in it was at or below the exemption, which in New York’s five boroughs and Nassau and Suffolk [if you choose to use state bankruptcy exemptions] is currently $170,825.0000), the lien stays on that property and when you refinance or sell, guess what?
You have to pay off the lien.
Just from reading this post, you can see that this business of discharging taxes is complicated, and not something that you want to handle on your own. You don’t want to cheat yourself, and you don’t want to kid yourself either, so the bottom line is when contemplating a bankruptcy, get professional help and hire a debtor-creditor attorney.
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Bradley R. Bailyn, Esq. , Founder
Bradley R. Bailyn, Esq., is a New York City-based attorney, author and speaker with practice area expertise in commercial real estate and bankruptcy law. Prior to founding The Bailyn Law Firm, Mr. Bailyn served as in-house counsel for multiple companies, where he advised on all legal aspects of major business and financial transactions including private equity, spin-offs, real estate, and restructuring transactions, for more than thirteen years.
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