Got old tax debt in Greensboro? Bankruptcy may help
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When you get into a situation of unaffordable debt, the consequences can be far-reaching. One side-effect of money problems may be delinquent tax debt. If you didn’t have enough withheld from your paychecks during the year, you might find that you owe the IRS. When you’re already struggling to pay bills, it might be impossible to send Uncle Sam what you owe. With tax day just around the corner, on April 17, here’s what you need to know about unpaid federal income taxes.
Can bankruptcy erase tax debt?
The simple answer to the question of bankruptcy easing tax debt is “maybe.” It depends on the type of tax, how long the tax was outstanding, and whether you filed the tax return promptly. Bankruptcy laws allow consumers buried in debt to discharge income taxes but not other types of taxes like withholding taxes or sales tax.
Rules for discharging income tax debt
Income tax debts may be eligible for discharge under Chapter 7 and 13 of the bankruptcy code under certain circumstances. With Chapter 7, you can get a full discharge of an array of unsecured debt, i.e., debt not attached to an asset like a home to a mortgage or a vehicle to an auto loan. In Chapter 13, you get on a repayment plan to catch up on debt and may pay a lower amount on unsecured debt.
To be dischargeable, tax debt must meet certain criteria including:
- It must be income tax debt
Only income tax debt is eligible for bankruptcy discharge, not other types of taxes like withholding or sales tax which is money you collected from someone else and belongs to the government.
- The tax debt must be aged
The tax return must have been filed at least three years before you filed bankruptcy. Any extensions granted within that period are considered when calculating the due date for bankruptcy purposes.
- Returns must have been filed at least two years ago
The tax returns must have been filed at least two years before you file bankruptcy. If you didn’t file on time or under an authorized extension, the debt might not be dischargeable.
- Tax assessment must be at least 240 days old
The IRS must assess the tax at least 240 days before you filed for bankruptcy or not have assessed it all meaning the tax calculated on your return is considered valid.
- Tha tex return must be legitimate
Most importantly, your tax return cannot have been filed fraudulently or with deliberately inaccurate information. To be discharged of older tax debt, you must have played by the rules.
Bankruptcy won’t dissolve a tax lien
Another critical thing to know is that if the IRS placed a tax lien on your property, it’s more complex. The underlying tax may be discharged in Wilmington bankruptcy, but the lien still stands. That means you must resolve the tax lien before you sell your property or when you sell, Uncle Sam can take a cut of the proceeds of the sale or block the sale until you resolve it.
Unfiled taxes are not dischargeable
Finally, if you failed to file your tax return and the IRS based your taxes due on a return they filed on your behalf, the debt can’t be discharged in bankruptcy. That means if you ever can’t afford to pay your income taxes, you should still file the return so the clock starts ticking on when it can be discharged in bankruptcy as well as the statute of limitations.
Bankruptcy discharge can be a better solution than waiting out the IRS because the taxman has a full 10 years from the date your return is filed to get their money out of you. To find out more about how North Carolina bankruptcy can protect you from past-due income taxes, contact the Law Offices of John T. Orcutt.
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