There are many understandable reasons why someone might become unable to pay their taxes. Serious illnesses, job loss, or a family emergency might require you to prioritize these crises ahead of paying or even just filing your taxes. After all, when you’re forced to choose between paying your mortgage or paying your taxes, keeping a roof over your head comes out on top.
If you owe the IRS and can’t pay, bankruptcy may be an option for you. In certain cases, your tax debt may even be forgiven. Tax debt is particularly complex area of bankruptcy law, however, so it’s important to know the ropes before you file for bankruptcy. This guide will address some of our clients’ most common questions and concerns about taxes and bankruptcy.
Do I Have to File My Tax Return if I Can’t Afford to Pay?
Even if you can’t afford to pay the taxes you owe, you are still required to file your tax return. It can be tempting to ignore your taxes entirely, but the IRS will charge you non-filing penalties on top of non-payment penalties, as well as interest. This only makes matters worse for you.
The IRS and the Automatic Stay
When you file for bankruptcy, an automatic stay goes into effect. Your creditors must immediately cease any debt collection efforts. This means they may no longer call you, sue you, bill you, or garnish your wages. Just like with other creditors, the automatic stay also applies to the IRS.
However, the IRS may decide to hold your refund until your automatic stay expires, and then repay itself out of your refund. The IRS may also withhold your refund in order to pay child support that you owe.
Is Tax Debt Dischargeable in Bankruptcy?
In Chapter 13 bankruptcy, your tax debt will be treated like any other debt and included in your repayment plan. At the end of the term, remaining tax debt will be wiped out.
In certain Chapter 7 bankruptcy cases, tax debts can be discharged (wiped out) completely. However, tax debt may only be discharged if it meets very specific requirements—and timing is extremely important as well.
— You must have filed your tax return at least two years before you file for bankruptcy. If your extensions expire and you still have not filed your return, the IRS will file a return on your behalf. In this case, the court may rule that your debt is not dischargeable as you didn’t file the return yourself.
— The debt itself must be at least three years old.
— Only income taxes are eligible to be discharged.
— You must not have committed fraud or attempted tax evasion.
— If a debt is determined to be dischargeable, penalties and interest will also be discharged.
Tax liens made by the IRS are not affected. If the IRS places a lien on your house for unpaid debt, that lien will persist, even if the debt is discharged. You must take action to remove the lien prior to selling your property.
Do I Have to Pay New Taxes?
You are not allowed to accrue new debt when you petition for bankruptcy, and tax debt is no exception. This is called “post-petition debt,” and because it wasn’t disclosed when you filed, the typical bankruptcy laws do not apply. This means no automatic stay and no protection from collections.
Not paying post-petition debt could have serious implications for your bankruptcy. If you are in Chapter 13 bankruptcy and are unable to pay current taxes, your Chapter 13 bankruptcy may be converted to a Chapter 7, or even dismissed entirely.
Work with Experienced Illinois & St. Louis Bankruptcy Attorneys
If you are considering filing for bankruptcy to erase your tax debts, it’s important to speak with a qualified bankruptcy attorney so you can get a clear picture of whether you will be able to eliminate or reduce the income taxes you owe the IRS. Working with the bankruptcy lawyers at Benson Law Firms will give you the best chance at getting a fresh start. Please contact us today for your free consultation.