Bankruptcy wipes out taxes and leaves you with a clean slate.
But somehow, the second biggest myth about bankruptcy is that taxes can’t be discharged. Wrong, wrong, wrong.
The limits on discharging taxes in bankruptcy are few. You can’t discharge
- taxes first due in the last 3 years;
- taxes for years you haven’t filed a return for; and,
- if you’re an employer, taxes you withheld for employees and didn’t pay to Uncle Sam.
That’s it. Like anything in the law, there are details that make for hard reading. But that’s the list.
So, you can wipe out older income taxes, tax penalties, interest, in either chapter of bankruptcy, and, in Chapter 13, tax liens. Also, you can get the IRS to stop garnishing your wages or levying your assets with the automatic stay that comes with bankruptcy.
Discharging taxes depends on timing
The timing element of discharging taxes is critical. The three timing rules look at
- when the return was last due without penalty;
- if not filed timely, has the return been on file with the taxing authority for two years; and
- were the taxes assessed more than 240 days before filing bankruptcy.
This information is available online from the IRS in an account transcript. Here’s how to access your tax account transcript.
Not a do-it-yourself project
The hard reading and hidden exceptions is why you need a bankruptcy lawyer experienced with tax issues in you want to wipe out taxes for certain. It’s too easy to make a mistake otherwise.
Tax troubles can influence your choice of bankruptcy chapters and the quantum of relief available, things too individual to address in a blog post.
Or, you can wait for the IRS 10 year collection statue to run out. Or the 20 year statute of limitations on California state taxes.
Which is it going to be?