Handling Tax Debt in a Chapter 7

I will owe more in taxes next year and want to include them in a Chapter 7 I am filing this year. What do I do?

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Bill's Answer: Answered by Daniel Cohen

If you file a Chapter 7 or 13 in 2010, it is my understanding that you cannot include future tax obligations in the initial bankruptcy filing. (Readers, I welcome your corrections in the comments below.) The earliest you can file 2010 returns is early in 2011, after the 2010 tax forms and laws are public.

As you suggest, you could pay 2010 estimated taxes now, even before you file. That way, you will not owe money when you file. The problem with this option is affording the expense involved.

Speak with a bankruptcy attorney and ask if you can file the bankruptcy petition in 2010 and then amend it after the 2010 taxes are filed and the tax assessment is in place. This way, you can avoid any problems with the state and federal tax authorities for not paying the 2010 balance in full by the due date.

File your 2010 taxes as soon as you can, so that the assessment is in place at the earliest date possible, then let your attorney know what you owe to both the state and IRS.

Once your bankruptcy case finalizes, the state and IRS will likely contact you in short order, as they are notified by the court when your bankruptcy is discharged. Be proactive. Contact the IRS and the state as soon as your case discharges and negotiate a long-term installment agreement. For the IRS, if the debt is less than $25,000, the payment can be spread out over a number of years. Each state has its own rules for what size tax debt can be included in a time-based payment plan and how long a payment plan can last.

Some tax debts can be reduced through an Offer in Compromise. However, it is likely a person who qualified for a Chapter 13 bankruptcy repayment plan, instead of a Chapter 7 bankruptcy that discharges obligations, will be viewed as able to make payments on the debt. I encourage you to read more about tax debt help and the Offer in Compromise.

Three Rules for Including Federal Tax Debt in a Chapter 7

A common misconception is that tax debts cannot be wiped out in a Chapter 7 bankruptcy. This is not true. Some tax debts are eligible to be included in a Chapter 7 bankruptcy and to be discharged entirely. To include an IRS tax debt in a bankruptcy, the tax debt must meet three basic rules:

  • The taxes must have been due for at least three years
  • The tax return must have been filed by the taxpayer for at least two years. Returns the IRS files for a taxpayer, called substitute-for-returns, are not eligible for inclusion
  • The tax assessment must be in place for at least 240 days

If your tax debt exceeds $25,000, or face a wage or bank levy from a tax debt, or cannot afford to pay a tax debt, get a free consultation with a tax professional.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

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Comments (5)


Sandra M.
Portland, OR  |  February 11, 2011
I filed a Chapter 13 in December 2010 and I am being allowed to add my 2010 IRS Tax Debt to my plan. I just estimated how much I thought I would owe. I am not able to add my State of Oregon tax debt though. You just need to ask for it in your plan when it is initially sent to the Trustee.
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Bob H.
Folsom, CA  |  April 13, 2011
Need a good bankruptcy agencey in Sacramento. Back taxes
Bills.com
April 14, 2011
Call the Sacramento County Bar Association and ask for the list of lawyers in your area who specialize in, or have a certificate in bankruptcy. Read the Bills.com resource Find a Lawyer to learn what questions you should ask before hiring a lawyer.
David B.
Seattle, WA  |  February 02, 2011
income taxes over 3 years old are discharged in bankruptcy. taxes withheld from employees' wages and not paid will not be discharged in bankruptcy.
Bills.com
February 03, 2011
Just because a tax is over three years old does NOT mean it can be discharged in a Chapter 7 bankruptcy. There are three criteria for discharging an income tax debt in a bankruptcy: the taxes must be due for three years, have been filed for two years, and the assessment must be in place for at least 240 days. You are correct that a payroll tax debt for an active business can't be discharged in a bankruptcy.
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