Can You Eliminate Tax Debts in Bankruptcy?

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Can you eliminate tax debts in bankruptcy? In many cases, a taxpayer is still liable for tax debts after bankruptcy. However, bankruptcy law allows the discharge of tax debt only in some circumstances.

A tax debt is more likely to be discharged in Chapter 7 than in a Chapter 13 bankruptcy. In Chapter 13, tax debt, just like any other debt, is paid back on a repayment plan. Chapter 7 bankruptcies allow a debtor to discharge or wipe out debts, including federal tax debt.

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A tax debt is more likely to be discharged in Chapter 7 than in a Chapter 13 bankruptcy.

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Federal tax debt that can be wiped out, depending on the type of tax debt and certain conditions under Chapter 7 bankruptcy, such as:

• The tax must be for income taxes. Payroll taxes and penalties for fraud are not eligible for discharge.
• The tax returns for the debts must have been filed two years before filing bankruptcy.
• The tax liability is at least three years old. In other words, the tax debt is from a tax return that was originally due at least three years before filing bankruptcy.
• The IRS assessed the tax debt at least 240 days before the debtor filed for bankruptcy.
• The taxpayer did not commit willful tax evasion. Possible evasive actions include changing your Social Security number, your name, the spelling of your name, repeated failure to pay taxes, filing a blank or incomplete tax return, and withdrawing cash from a bank account and hiding it.
• The taxpayer did not commit tax fraud.

Penalties on taxes can also be wiped out in bankruptcy. After the discharge of the tax liability, the taxpayer is no longer responsible for paying the taxes and the IRS may not garnish wages or bank accounts.

Even if the discharge of tax debt occurs under Chapter 7, if the IRS placed a federal tax lien on the taxpayer’s property prior to the bankruptcy case, it will remain after discharge. As a result, it is necessary to clear the title by paying off the lien before selling the property.

There are tax debts that are not eligible for discharge, such as tax debts from unfiled tax returns and trust fund taxes or payroll taxes withheld from employee’s paychecks by the employer. If a taxpayer is not able to discharge the tax debts under Chapter 7, he or she should consider an installment plan or offer in compromise to settle the tax debt with the IRS.

If you think you can wipe out your federal taxes under bankruptcy, you should hire a qualified tax problem specialist. We have experience and strategies negotiating with the IRS. If you have any questions, give me a call or send me an email. I would be happy to help you!

The Cardinal Sin of Tax Delinquency

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Payroll taxes are taken very seriously by the IRS. What happens if you fail to pay payroll taxes or file them on time? You will get hit with a Trust Fund penalty.

A Trust Fund penalty is a 100% penalty on the person who is responsible for payment of withheld federal payroll taxes and FICA taxes from the employees of a company. The IRS views failing to pay payroll taxes as the cardinal sin of tax delinquency because a large portion of the payroll taxes are your employees’ withholdings, not your own money.

In other words, not paying your company’s payroll taxes is tantamount to stealing your employees’ money. As a result, penalties for not paying your company's payroll taxes and filing your payroll tax returns are much more severe than other types of penalties. They can drastically multiply and grow the amount you owe in a very short time.

If you’re behind on paying payroll taxes on time for your company, watch out. If you are a control person, and not an officer or owner, you are also liable for these taxes personally. The IRS will seize your personal assets, bank accounts, and put your employer out of business rather than let you continue to avoid paying payroll taxes.

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Failing to pay payroll taxes is the same as stealing money from your employees.

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The IRS will go after the company responsible for the payroll taxes and the control person at the same time. A control person may simply be the bookkeeper, the person who signs the checks, or another responsible person, even if that person is not the owner or officer of the company.

The Trust Fund penalty is 100% of the withholdings of Federal and FICA from the employee, plus interest. Other payroll tax penalties to the employer include:

• Failure to file the payroll tax returns on time is 5% per month, up to 25% of the taxes.
• Failure to electronically pay your taxes on time can be 10% of the taxes not paid. The schedules of payment due dates depend on the amount of taxes due. This can be within three days of your payroll dates, up to once per quarter if the taxes are very low. Many small employers pay monthly.

Actual due dates and more details are available at www.IRS.gov. This is a lot of information, but the point is you should never get behind on payroll tax payments or filings. The IRS takes payroll taxes very seriously!

If you have any payroll tax problems or receive a collection notice for payroll taxes personally, you should hire a qualified tax problem specialist. We have experience and strategies for getting tax releases and negotiating with the IRS. Please give me a call or send me an email. I would be happy to help you with any questions!