The answer is often “yes.”
The majority of the potential clients we speak to have past due taxes.
Most people are surprised when we tell them they might be able to discharge some or all of their taxes in bankruptcy.
But, many criteria must be met. These are discussed in more detail below.
To get started, you will need to order copies of your federal tax account transcript. Order a transcript for each tax year you are trying to discharge.
If you have California Franchise Tax Board taxes, you will need to order copies of your Franchise Tax Board account transcripts.
To be dischargeable, the tax return must have originally been due at least three years before your bankruptcy filing date.
The “due date” can be tricky when tax deadlines don’t fall on April 15 (for example, during COVID 2020), or the taxpayer had an extension to file their taxes for a particular year.
At least two years prior to your bankruptcy filing date, you must have filed a tax return for the debt you are trying to discharge.
The taxing authority must have assessed the tax against you at least 240 days before you filed for bankruptcy. This time limit may be extended if there was an offer in compromise between the taxing authority and you or if you previously filed for bankruptcy.
Note: many times late-filed tax returns take a very long time to be processed by the IRS. Just because you filed a return several years ago, do not assume it is impossible that you have a “new” assessment that has hit your tax account in the past 240 days. This is why you need to order tax transcripts.
If you don’t file your taxes, the IRS will eventually file what is called a substitute return on your behalf. The substitute return assesses the amount of tax you owe.
The IRS will object to discharge of tax when the IRS was forced to prepare a substitute return.
Payroll taxes or penalties for fraud cannot be discharged in bankruptcy.
If you filed a fraudulent tax return, bankruptcy can’t discharge your tax liability.
A bankruptcy may be able to wipe out your personal liability for the tax debt.
But, if a taxing authority has recorded a tax lien on your property, the lien can remain even after the bankruptcy.
A federal tax lien protects the government’s interest in all your property, including real estate, personal property and financial assets. A federal tax lien exists after the IRS (1) assesses your tax liability and (2) Sends you a bill that explains how much you owe (Notice and Demand for Payment) and you don’t pay the tax debt.
The IRS files a public document, the Notice of Federal Tax Lien, to alert creditors that the government has a legal right to your property. The notice is filed in the county where you live or where the property is located. Once the IRS files its notice, it has a lien against all property — real or personal — that you own. The lien attaches to all property that you own from and after the date that the IRS files its lien. Federal tax liens continue in effect for up to 10 years after the IRS assesses the taxes that you owe.
Most Federal Tax Liens remain intact after a Chapter 7 bankruptcy.
If you have past due taxes, give us a call at (805) 284-0760 for a free consultation.