Can I Eliminate My Past Due Income Taxes in Bankruptcy?

There is no debt collection agency more vigilant and oppressive than the Internal Revenue Service (IRS). When you are delinquent on federal or state income tax, the interest and penalties can spiral out of control. The penalty charged for filing late with the IRS generally amounts to five percent per month and may continue to accrue up to 25 percent of the amount due based on the individual’s tax return. The applicable penalty for not paying on time is ½ of one percent up to a maximum of 25 percent of taxes that are due but unpaid. An individual’s tax liability can escalate at a staggering rate because interest is calculated on the unpaid balance as well as penalties and interest added to the tax account.

There are many aggressive collection methods that the IRS can use, including forcing you to sell or mortgage assets, levying against bank accounts, garnishing income, seizing assets and reporting unpaid tax obligations to credit bureaus. Because tax obligations can rapidly go from manageable to ruinous, you should seek legal advice promptly. Although many people inaccurately presume that unpaid income taxes are never dischargeable in bankruptcy, tax debts can be discharged under certain circumstances.

Debtors can discharge federal, state and local income taxes in a Chapter 7 bankruptcy. There are specific timing requirements that will dictate whether outstanding income tax obligations are dischargeable. These rules set forth in the Bankruptcy Code are often referred to as the 3-2-240 rules. Under these timing rules, income taxes are dischargeable if they were due at least 3 years prior to the bankruptcy filing provided a minimum of 2 years have passed since you filed your tax return, and 240 days have passed since the taxes were assessed. All three timing requirements must be applicable to obtain a discharge.

There are many complicated issues in terms of interpreting these rules, so you should seek an experienced bankruptcy attorney if you have questions about discharging income tax obligations. The good news for debtors who qualify to have their past due taxes discharged is that the penalties and interest will also be eliminated.

Even if these timing requirements are met, there can be other issues that impact your ability to discharge unpaid taxes in bankruptcy which include the following:

• Current Tax Liens: While Chapter 7 can discharge your liability to pay past due taxes, existing liens placed on your real estate will not be eliminated by the bankruptcy discharge. Debtors should speak to their bankruptcy attorney about any such liens, so the attorney can provide advice about the impact of the liens, and whether they can be removed.

• Filing of Tax Returns: Generally, you will need to have filed your tax returns to discharge unpaid tax obligations. If the IRS files a return for you, this will not satisfy the requirement of filing the applicable tax returns.

• Tax Evasion or Fraud: If you are shown to have willfully evaded your tax obligation or to have committed tax fraud, you will not qualify for a discharge of your unpaid tax burden. However, mere inadvertence will not disqualify you for discharge of your past due taxes.

If you owe past due income taxes, our experienced Baltimore bankruptcy lawyers at Georgette Miller and Associates P.C. can evaluate your situation and advise you regarding your options. Please feel free to contact us today at 866-964-6529 to learn how we can help.