Another tax filing season has come and gone, but millions of Americans still owe back taxes to a state or the federal government. Bankruptcy can offer relief from onerous collection tactics and, in many cases, eliminate the underlying debt altogether.
In terms of federal liabilities, most 1040 taxes are dischargeable. This would include any self-employment tax due under Schedule C, alimony received, annuity payments, government benefits and gambling winnings. The same holds true for most state taxes. Personal income taxes are typically dischargeable, while payroll taxes, capital gains taxes, and similar items are not in this category.
Most courts follow the 3/2/240 rule. First, the debt must be at least three years old. Most personal taxes are due on April 15. So, if you filed bankruptcy on April 14, 2015, any past-due amounts from tax years 2011 and before meet the first prong of this test. Second, the returns must have been on file for at least two years. So, if our hard-luck taxpayer owed money from tax year 2011, the returns must have been filed no later than April 14, 2013. A side note: some courts may require on-time filings.
Thirdly, the debt must not have been “assessed” within the last 240 days, which is roughly eight months. In most cases, the IRS assesses the debt every time you receive a collections notice. If you do not have your most recent notice, it is a very good bet that the taxing authority kept a copy.
Finally, if you “willfully evaded” the tax, the debt is not dischargeable. A bankruptcy attorney can often partner with a tax attorney in these situations, as this term has a very specific meaning.
The automatic stay in a Chapter 7 or Chapter 13 Bankruptcy prohibits all creditors from taking any action against debtors in Bankruptcy. “All creditors” includes the IRS, the New Jersey Division of Taxation, and any other state revenue agency. If you are receiving collections letters, they must stop. If your paycheck is being garnished, the garnishment must be released. If the taxing authority threatened to place a lien on your property, it may not carry out that threat.
If there was already a tax lien on your personal or real property, the taxing authority cannot collect on the lien during your bankruptcy, but the discharge order does not extinguish the lien.
Contact John Hargrave and Associates
We have provided comprehensive counsel to individuals in and around Barrington, New Jersey, since 1977. To schedule a free initial consultation, contact our office by e-mail or call us at 856-759-6022 (toll free at 866-662-3191).