By Ryan C. Wood
Discharging income taxes by filing for bankruptcy protection will most likely see an increase as incomes remain stagnant and taxes increase. We all need to face the fact that our government has a lot of debt and we will have to pay for it via increased taxes. I am not just talking about the national debt. The hidden tax burden is every city, county and local school district throughout California has issued bonds to pay for various services and capital upgrades. So what are 5 things you should know if you discharge income taxes by filing bankruptcy?
1. You Should Obtain an Account Transcript Before Filing Bankruptcy
Given that whether you can discharge taxes is all about when the return was filed, when the taxes are due and when the taxes were actually accessed it is important to know before filing for bankruptcy what the tax authority believes those dates are. To know for sure a tax transcript from the taxing authority should be obtained and reviewed.
2. You Do Not Need To File An Adversary Proceeding To Discharge Taxes
I do not know if this is a common misconception, but there is a San Francisco law firm that claims it specializes in tax matters and for some reason files an adversary proceeding in what appears to be each bankruptcy case they file when taxes are being discharged. The attorneys’ fees charged are extremely high and for what? The only time you need to file an adversary proceeding is if the Internal Revenue Service, Franchise Tax Board or other taxing authority does not agree the unpaid income taxes were discharged and continues to attempt to collect the taxes after you obtain your discharge. You will then need to file a lawsuit/adversary proceeding to determine who is right. It is quite troubling how a $1,500 Chapter 7 bankruptcy case gets turned into a $4,000 Chapter 7 bankruptcy case.
3. If You Filed An Extension Be Careful
If you filed an extension to file your tax return for one of more years, that will affect the filing date of the tax return and due date for the taxes owed. For the Internal Revenue Service you have to request an extension. For the California Franchise Tax Board they will automatically give you an extension if you do not file your return on time. Other state taxing authorities may do the same think. As provided in number one above it is important to obtain an account transcript to know the relevant dates before filing for bankruptcy protection. If you know your filed an extension make sure you let your bankruptcy attorneys know this during the initial consultation.
3. Taxes Are Dischargeable When Filing Bankruptcy If The Circumstances Are Right
Unpaid income taxes can be discharged if 1) the taxes are due more than three years ago before the petition date, 2) filed at least two years prior to filing bankruptcy, 3) the taxes need to be assessed more than 240 days (8 months) ago, and 4) no filing of fraudulent returns or willful attempts to evade or defeat a tax.
4. What About Penalties and Interest
One of main reasons why our clients choose to file for bankruptcy is because the interest on their debts is killing their ability to pay back the underlying debts owed whether it be a credit card or taxes. The good thing about discharging income taxes is that if the underlying tax debt is dischargeable then the accrued penalties and interest are also dischargeable.
5. It is Important That All of Your Tax Returns Are Filed Before Filing Bankruptcy
This is especially true if you are self-employed or own a business. In a Chapter 7 you have to provide the Chapter 7 trustee via your bankruptcy lawyers your last filed return. That does not mean you have to have all of your tax returns filed, but the Chapter 7 trustee may not be able to close the case without reviewing your recently filed returns. In a Chapter 13 case Section 1308 requires that no later than the day before the date of the first scheduled meeting of the creditors that returns be filed for the four year period ending on the date the petition was filed.
