Bankruptcy is a scary and unwelcome reality in any person’s life. However, this unfortunate reality strikes people’s pockets. It can affect many other areas of your life, like financial dealings with other people or the government through tax debts.
Therefore, it’s imperative to understand how bankruptcy affects your tax debt before filing for it.
You don’t need to panic if your dwindling financial fortunes force you into bankruptcy. You can enlist a reputable tax solutions provider to discover the available solutions that can address your bankruptcy process. These professionals can help you understand which taxes are exempted and how to meet their legal requirements.
For example, income tax debts may qualify for discharge under the Bankruptcy Code’s chapters 7 or Chapter 13. However, the eligibility depends on the debt age and other factors. Read on to learn and benefit.
You May Read: How to Prepare for an IRS Tax Audit
Criteria for Discharging Tax Debts
Chapter 7 of the Bankruptcy Code comes in as a handy option if you want to discharge your tax debts. However, everything depends on whether your tax debt qualifies for the discharge or not because some debts don’t qualify. Your debt should meet all of this Chapter’s requirements. Remember, tax laws associate tax debts with specific tax returns and years.
These regulations set out particular requirements determining how old taxes should be before qualifying for discharge through bankruptcy. Below are the five criteria that determine a tax debt’s eligibility for a discharge.
The Return Was Due Three Years Ago
Your tax debt only qualifies for a discharge if it was due for return thirty-six months before you filed for bankruptcy. The due date includes all your requested extensions. For example, you can include your debts in bankruptcy filing until November 2023 if you wish to request an extension for your 2019 returns.
You Filed the Returns Two Years Earlier
Your debts should also relate to tax returns filed at least twenty-four months before filing for bankruptcy. The taxman measures this period from the date you file the returns. Mostly, it covers similar periods like due dates unless you delayed filing the returns.
It’s also worth noting that any tax debt arising from an unfiled tax return doesn’t qualify for a discharge. You have to distinguish this fact because the IRS regularly examines taxes on unpaid returns. You can only discharge such liability if and when you file a tax return for that particular annual period.
Your Tax Assessment Was Eight Months Old
This criterion also serves the same purpose as the first two criteria. The IRS can assess taxes back to eight months before filing for bankruptcy. The IRS can assess the matter from a final audit determination or due balance.
You Aren’t Seeking to Evade Tax
Your tax debts also qualify for discharges only if you aren’t trying to evade paying taxes. The IRS checks your application to ensure that it has no fraud. For instance, you can’t claim that you wanted to buy a chopper, and then filing for bankruptcy comes knocking at your door. Such a move would make you guilty of conspiring to evade taxes.
Other Qualifying Rules
A bankruptcy petitioner must convince the IRS that they duly and promptly filed their returns for the last four years before the taxman grants them a discharge. Additionally, a petitioner must furnish a bankruptcy court with copies of their latest tax returns. The petitioners should be ready to supply return copies to any creditor who requests them.
Other quarters also have extra requirements. Some require bankruptcy petitioners to file their returns promptly to benefit from tax debt discharges. Another condition in the 7th Chapter is that if petitioners paid their non-dischargeable tax debts using credit cards, their card balances are disqualified from tax debt discharge.
Limitations to Federal Tax Lien
Yes, you can breathe a sigh of relief if you qualify for a certain tax debt discharge. However, it’s prudent to understand that federal tax liens are limited. You shouldn’t over-celebrate because filing for bankruptcy doesn’t eliminate any of your recorded tax liens.
Therefore, such liens remain on your affected properties. You need to settle the tax liens before you dispose of or transfer the property’s title to someone else.
The 7th Chapter of bankruptcy only allows for eliminating your personal obligations to pay the eligible taxes. Also, it only prevents the IRS from going after your salary or bank accounts. You have the facts at your fingertips.
But the journey can be challenging if you try handling it alone. That’s why it’s beneficial to engage tax professionals and their tax solutions to help you reap maximum benefits.