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File Your Taxes! Even if You Cannot pay Them Now

Bankruptcy Article by Daniel Reinganum

The end of January marks the beginning of tax season! For people who are owed a tax refund, tax season marks a positive time of the year, when that extra bonus check arrives in the mail. However, for those who owe taxes, tax season can be a dreaded time of the year. In today’s tough economic times a growing number of people are looking at owing taxes but being unable to pay them. So what should you do if you owe taxes but can’t pay them? Should you file a tax return or not file your tax return?

Answer: You should file your tax return. Here are two good reasons why:

Reason #1: If you fail to file your tax return, the IRS will assess a penalty for ‘failing to file’. This penalty is separate from the ‘failure to pay’ penalty which the IRS will assess for being unable to pay your taxes come April 15th. The penalty for failing to file builds up ten times faster than the penalty for failing to pay. According to the IRS’s ‘Eight Facts on Penalties’, the ‘failure to file’ penalty is assed at the rate of 5% of the tax owed, per month, up to 25% of the tax owed. This is in stark contrast with the ‘failure to pay’ penalty, which is assed at 0.5% of the tax owed per month, up to 25% of the tax owed.

Reason #2: Unpaid income taxes can be wiped out with a bankruptcy filing. Most people do not know it, but older unpaid income taxes can be wiped out with a bankruptcy filing. In general, income taxes can only be wiped out in a bankruptcy if the following things are true:

1. The tax is three or more years old.
2. The tax return had been filed two or more years before filing the bankruptcy.
3. No IRS assessments have been made in the last 240 days; and
4. There was no attempt to evade payment of taxes or commit tax fraud.

The key point here is #2 – the requirement that the tax return be filed two or more years prior to the bankruptcy. To preserve your ability to wipe out the unpaid income taxes, you need to file them in a timely manner.

At John W. Hargrave & Associates we regularly assist people with discharging unpaid income taxes through bankruptcy. If you have significant tax debt from prior years that is haunting you, bankruptcy may be the smart choice. Schedule a Free Consultation today by calling 856-547-6500.

Standard Legal Disclaimers:

This article is not legal advice and does not create an attorney-client relationship. Consult with your attorney or tax professional before making important tax decisions.

IRS CIRCULAR 230 DISCLOSURE: Pursuant to Treasury Regulations, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used or relied upon by you or any other person, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax advice addressed herein.