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If you are considering filing chapter 7 or chapter 13, this means that you’ve got too much debt to deal with. What we commonly see with clients is that in addition to being troubled with consumer debt, there are also back taxes that are owed. The good news is – depending on your specific circumstances with taxes past due – you may be able to have them written off in either a chapter 7 or chapter 13 bankruptcy. Here’s what you need to know:
Five Basic Rules for Eligibility of Income Tax Discharge
The IRS doesn’t have a sense of humor about income taxes owed and not paid. And while they are not the sort of debt collector that will call you every day at work, they operate with more onerous weapons at their command such as bank and wage garnishments! But if your tax dilemma meets these five requirements, you should be able to write them off in chapter 7 or 13.
- The due date for the taxes must be at least three years prior. This means that taxes due on your three most current tax returns will not be eligible for write-off.
- The tax returns must have been filed at least two years ago. This means that if you filed them late they must not be overly delinquent.
- The tax assessed must be older than 240 days. This means that there must be a final statement of taxes owed that’s at least eight months old.
- The tax return must not be fraudulent. This means that you have to have followed all of the rules and not tried to cheat on your taxes!
- The person who filed the return (you) must not have been trying to commit tax evasion. This means that you can’t have hidden income or puffed deductions or credits.
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Sixth Unwritten Rule for Eligibility of Income Tax Discharge
Those five rules represent the ones that are part of the legislation related to income tax discharge in bankruptcy. In addition to codified law, there is also what’s known as “case law” in our country. Case law is made when a judge issues a ruling on a point of law that then becomes de facto law (law as a matter of fact).
Let me explain. If you fail to file a tax return, the IRS may eventually file one on your behalf. This is called a Substitute for Return. The IRS received wage information in the form of W-2s or 1099s from employers. If you don’t file a return, they can use this information to file one for you as a substitute for the one you should have filed. In 2012, a bankruptcy court case ruled that a substitute return does not count as a return for bankruptcy discharge purposes.
When it comes to income taxes and bankruptcy another important rule is that you must have been the one to file your tax return. Once a substitute return is prepped by the IRS that tax year can never be included in bankruptcy discharge. Not only that, but if the IRS preps a substitute return it will maximize the amount of tax you owe by minimizing deductions and credits. This means that if you have significant deductions such as contributions or donated assets to 501(c)(3) charities, your assessed taxes willbe higher than they should be!
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Beware the IRS
If you’ve met the above criteria, you should definitely talk to a reputable North Carolina bankruptcy attorney like John T Orcutt about your debts and past due income taxes. And if you haven’t filed your income taxes for the past several years, you will have to before your bankruptcy case will be finalized. Your assigned bankruptcy Trustee will ask to see your last few years of tax returns. If you haven’t already filed them you’ll need to do so ASAP even if you can’t afford to pay the taxes right now.