Stop Taxes ASAP in Bankruptcy Raleigh, NC!
So you didn’t think you could bankrupt taxes?
Filing a Chapter 7 bankruptcy may erase your tax debt. Income taxes can be discharged in Chapter 7 bankruptcy, but only if all of the tax code rules are met.
The tax return on which the tax debt arises
- Must have been due at least three years before you file for bankruptcy. The tax return must have been filed at least two years ago for a tax year at least three years ago-this usually means April 15 of the year the return was due. If an extension was filed, then it means August 15 or October 15 of that year, or beyond to the actual filing date. If the 15th falls on a Saturday or Sunday, the return wasn’t due until the following Monday. The tax return must also have been filed at least two years before the bankruptcy. (If the IRS files a substitute for a return it doesn’t count.)
- Taxes other than income, such as payroll taxes, a 100% penalty, Trust Fund Recovery penalty, fraud penalties, or several other unusual types of taxes are by law excepted from bankruptcy discharge.
- The tax must have been assessed over 240 days ago.
- The tax claim must be unsecured or there must be no equity in the property to take (this is explained later).
- If the tax return was fraudulent, or shows a willful evasion of payment, forget about a discharge.
- Other conditions must be met that are too difficult to explain to a lay person
Any limitation on the time allowed to the IRS to collect,
such as non-filing of the return or an offer in compromise or bankruptcy, “tolls” or extends the “3-Year Rule” past April 15th of the third year after the return was due. Other events can delay the bankruptcy filing date to discharge taxes, including prior bankruptcies. The time rules (3-Year, 2-Year and 240-Day) are all delayed by the period in the prior bankruptcy proceeding, plus an additional 6 months. If you file an Offer in Compromise, the 240-Day period is extended by the period it is under IRS consideration, plus 30 days.
The idea behind Chapter 7 Bankruptcy,
is that you turn over all your assets to the Court, which in turn pays your Creditors from that property. In most cases, there is no property to turn over after you are allowed to keep the minimum allowed to “start over” (your exemptions). In North Carolina, you are allowed to keep $3,500 equity in a car, $5,000 in personal property, $35,000 in a home. For a married couple, filing bankruptcy jointly, these exemptions are doubled. Property is valued at what it would have brought at auction or liquidation.
In Chapter 7 Bankruptcy,
the immediate impact of filing bankruptcy is that all collection efforts are stopped by a Federal Court Order called a stay. The IRS is included in this stay. The only way a collector can overcome the automatic stay while your bankruptcy case is still open is to apply to the Bankruptcy Court for relief from stay. Judges will rarely lift a stay for the IRS, unless the IRS can prove some kind of fraud is being perpetrated by the bankrupt taxpayer. Unfortunately, the statute of limitations for collections runs only while a person is not in bankruptcy. If the bankruptcy is not finished (discharged), the tax bill will not age for purposes of the statutes of limitations. If you go into bankruptcy and emerge from the process still owing the IRS, it gives the IRS extra time to collect the balance. This often happens if the Taxpayer has some, but not all, of their taxes erased in a Chapter 7. As a result, many taxpayers end up filing a “Chapter 20,” wherein they first file a Chapter 7 to eliminate what tax can be eliminated and then file a Chapter 13 to deal with what is left. The IRS can have a total of ten years to collect taxes, penalties, and interest. Once a bankruptcy case is over, the IRS gets whatever time remained on the original ten years, plus the time the bankruptcy case was pending-plus an additional six months to collect the remaining debt (if any). Chapter 7 cases will add about 4 months to this.