Discharging Federal Income Taxes in Bankruptcy

Discharging Federal Income Taxes in Bankruptcy

Believe it or not, you may be able to discharge your federal tax debts in bankruptcy. There are some specific rules and timelines that must be followed to qualify.In this blog I am referring specifically to what is known as a Chapter 7 bankruptcy filing which is a liquidation of debts available to individuals.

My firm, By The Book Taxes, located in Norwalk, CT specializes in income tax preparation for individuals, families and self-employed people. By the Book Taxes also helps clients resolve their tax debts by preparing and filing Installment Payment Agreements, Offers-in-Compromise, Currently Not Collectible and Innocent or Injured Spouse applications.

Federal income taxes may be eligible for discharge in bankruptcy if the following conditions are met:

  • The due date of the tax return for that tax year (including extension) is not less than three (3) years prior to bankruptcy filing date
  • The tax return was filed at least two (2) years prior to bankruptcy filing date
  • Any additional tax assessments due to audit or amendment occurred at least 240 days prior to bankruptcy filing
  • You can’t discharge a tax debt for a year that tax may still be assessed – under audit
  • An actual tax return must have been filed – no substitute for return (SFR) allowed
  • No fraud or willful tax evasion has occurred

Federal income taxes that are not eligible for discharge are those for tax years that are within the 3 year/2 year/240 day timelines, tax years that still may have future assessments, tax years for which an actual return has never been filed or where fraud or willful tax evasion has occurred.

Other taxes that may not be discharged in bankruptcy are called “trust fund” taxes. These refer to payroll, sales and excise taxes. They are called “trust” taxes because employers withhold payroll taxes from W-2 employees and are required to forward these taxes to the US Treasury.

Businesses collect sales and excise taxes from their customers and are required to file sales and excise tax returns and forward the tax to the appropriate federal or state and local taxing authority.

Failure to do so is a violation of the law. These taxes may be “compromised” with an “offer” but not discharged in bankruptcy.

If you have years of unfiled tax returns or owe the back taxes, please call me. I can help.

How to deal with a Federal Tax Levy

How to deal with a Federal Tax Levy

Last week’s article discussed how to avoid a federal tax levy.  It is linked here. But what do you do if you already have been levied?

My firm, By The Book Taxes, located in Norwalk, CT specializes in income tax preparation for individuals, families and self-employed people. By the Book Taxes also helps clients resolve their tax debts by preparing and filing Installment Payment Agreements, Offers-in-Compromise, Currently Not Collectible and Innocent or Injured Spouse applications.

You should do the same things after a levy has occurred as you would to avoid a tax levy:

  • Hire a tax professional with experience in tax resolution
  • File all delinquent tax returns (last six years)
  • Ensure your W-2 withholding or estimated tax payments are sufficient and up to date

You should also have the tax professional request that the IRS release the levy in full or at least partially in order to pay necessary living expenses while the taxpayer gets into compliance.

 The bank has twenty-one (21) days from the time the funds are removed from the taxpayer’s account to send them to the IRS so the taxpayer and tax professional must act quickly.

Once the tax returns are all filed, work with your tax professional to tailor the best collection alternative for you with the IRS whether it’s an installment payment agreement, offer-in-compromise or currently not collectible status.

Please don’t ignore the IRS collection letters!

If you have years of unfiled tax returns or owe the back taxes, please call me. I can help.

Avoiding a Federal Tax Levy

Avoiding a Federal Tax Levy

As the IRS escalates its collection process, taxpayers receive letters called the “Final Notice” before a levy occurs. Depending on which area of the IRS is threatening to levy, the taxpayer may receive a “Letter 11”, a “Letter 1058” or even a “CP 90” or “CP 91”.

The best way to avoid a federal tax levy is to get into tax compliance. Engage a tax professional who does tax resolution work immediately. Request a collection due process or “CDP” hearing to stop the levy process to give you time to propose a collection alternative to the IRS.

My firm, By The Book Taxes, located in Norwalk, CT specializes in income tax preparation for individuals, families and self-employed people. By the Book Taxes also helps clients resolve their tax debts by preparing and filing Installment Payment Agreements, Offers-in-Compromise, Currently Not Collectible and Innocent or Injured Spouse applications.

What is tax compliance? It comes in two forms, being current on the filing of your tax returns and being current in your tax payments.

For the filing of your tax returns, the IRS defines compliance as having returns filed for the last six (6) tax years. If you have unfiled returns during this period, get them filed!

For tax payments, there are three (3) requirements:

  • W-2 withholding for employees
  • Estimated payments for the self-employed and
  • Payroll tax filings and payments for businesses with employees

W-2 employees need to have at least 90% of their current year tax liability paid through withholding or 100% of last year’s liability withheld in the current year (110% of last year’s number if their income exceeds $150,000).

Once the tax returns are all filed, work with your tax professional to tailor the best collection alternative for you with the IRS whether it’s an installment payment agreement, offer-in-compromise or currently not collectible status.

Please don’t ignore the IRS collection letters!

If you have years of unfiled tax returns or owe the back taxes, please call me. I can help.