Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Don’t File Bankruptcy In December

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wait to file bankruptcyBankruptcy can wipe out taxes, but there’s a catch.

File bankruptcy before the end of the year and you fix only a part of your tax problems.

Tax troubles are at the heart of so many bankruptcy filings.  It makes sense:  bankruptcy is a powerful and predictable tool to get out of tax debt.

Yet I’ve been telling clients for weeks now:  don’t file bankruptcy…..yet.

Wait til January.

Why wait to discharge taxes

Because most people who owe back taxes are facing similar trouble for the current tax year.

Come the end of this tax year on December 31st, they’ll owe taxes for 2018 because their withholding doesn’t match the taxes due in April.

In Chapter 13, which is almost always the better chapter for tax troubles, the Chapter 13 plan doesn’t address tax years that aren’t closed when the case is filed.

That means that your liability for the year in which you file bankruptcy doesn’t get priority for payment over your credit card debts.  In fact, the open tax year often can’t be paid through the plan.

And I hate to see money go to general unsecured creditors when tax debt remains.

So, I’m counseling clients to wait til January to file.  Get this current year’s tax troubles rounded up and corralled in the Chapter 13.

Buy yourself 5 years to pay whatever you owe for this year along with the taxes that brought you in my door in the first place.

Tax liens in bankruptcy

Another one of Chapter 13’s superpowers is the ability to cut tax liens down to size.

No matter how huge the tax liens are, in Chapter 13 those liens get paid only the value of your possessions when you file your case.

Really, the liens get paid only the equity in your assets that remains after liens that were filed before the tax lien.

So even if the tax lien is $100,000, if the equity in your possessions is only $10,000, that’s what you pay over the 5 years of the plan.

And after the case is  over, the balance of the lien is voided along with the tax liability that it secured.

Pretty neat, eh?

When IRS threatens to levy

A notice of intent to levy is often what makes folks call up a bankruptcy lawyer.  That notice seems to promise doom and the end of life as you know it.

Know that an actual levy is the IRS’s last resort.  There are processes and procedures built into the Service’s collection process.

A levy gets only what’s in the levied bank account on the day the levy is served.  If the bank balance is tiny, the IRS’s recovery is tiny.

Usually, if you engage the IRS in discussions about a payment plan, or even make a payment on your debt, your case becomes a lower priority for an understaffed IRS.

It depends on the numbers, of course, but usually, the advantages to waiting til January 1 outweigh the risk of collection between now and then.

Once your case is filed, the IRS, along with every other creditor, is forbidden to continue collection action.

Before you file bankruptcy

There’s lots to do to prepare for a bankruptcy filing.  These weeks won’t be wasted.

Why your bankruptcy papers are critical

Your bankruptcy attorney will need lots of paper from you to get your schedules right and to calculate a plan to get you out of debt.

Some of the things you’re likely to need include:

  • Pay stubs for the past six months, including December’s
  • Tax return
  • Contract for any financed vehicles
  • Tax notices from federal and state
  • Appraisal or broker’s opinion on the value of your real estate
  • Proof that your retirement accounts are exempt
  • Bank and investment account statements

You also need to prepare to get your tax return for this year filed quickly after your bankruptcy is filed.  You have 45 days from the filing of your Chapter 13 to get the return filed.  So start gathering whatever you’ll need to get the return on file promptly after your bankruptcy case is filed.

And, readjust your withholding for next year so you are adequately withheld for the coming year.  Owing more taxes once you are in bankruptcy is grounds for the dismissal of your case.

Find a good bankruptcy lawyer

Bankruptcy is difficult enough.  You need to have confidence and rapport with your bankruptcy lawyer.

Use the time between now and the first of the year to interview a bankruptcy lawyer and find one with experience in tax matters.

How to interview a bankruptcy lawyer

It’s equally important to find a lawyer to whom you are willing to confide your secrets and your worries.  The problem I can’t protect you from is the one you don’t tell me about.

So when you hear those screeching commercials that say “don’t file bankruptcy”, you can add, “yet”.

File bankruptcy at the right time for the right reason.

If The IRS Comes Calling After Your Bankruptcy Discharge

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tax after bankruptcyIt’s scary, or infuriating, when the IRS continues to try to collect taxes discharged in bankruptcy.

What was the point of filing bankruptcy if the government ignores your discharge?

Yet IRS attempts to collect taxes from people with a bankruptcy discharge form the single largest group of cases in my law office today.

Why the IRS persists

Seldom is the IRS correct that taxes are still due.

Sometimes, the IRS is confused.  Other times, they appear to be indifferent to the bankruptcy discharge.

Too often, I suspect that their record keeping system is not up to the job.

But, whatever the excuse, you need to get it sorted out.  Let’s look at common issues found in IRS collection letters after bankruptcy.

Tax lien lives on

The most common letter from the IRS after a bankruptcy concerns tax liens that survive the bankruptcy.

A Chapter 7 discharge does not affect tax liens.  Tax liens pass through a Chapter 7 unaltered.

When a tax is discharged in bankruptcy, the tax lien does not attach to assets acquired after bankruptcy

Whether by design or not, the IRS letter to taxpayers emerging from bankruptcy with a surviving tax lien is poorly written.  It  doesn’t clearly spell out that the tax the IRS is trying to collect is just the sliver of taxes that attached to assets of value owned when the case was filed.

What to do?  Decide if the continued existence of the lien makes any difference in your economic life.  If you need to apply for significant credit, you may want to wipe out the lien by paying the value of the “stuff” it attached to when you filed.  If the lien attaches only to personal property with little real value, you may choose to simply let the lien die of old age.  Taxes are generally collectible only for 10 years from the date they are assessed, with some time added for time in bankruptcy.

IRS failed to credit taxes paid in Chapter 13

Can’t tell you how often this comes up.  The IRS is little better than mortgage servicers in keeping track of the money it is paid.

Occasionally, the confusion arises when only one of a married couple filed Chapter 13.  Somehow, the IRS didn’t connect the taxes paid through the Chapter 13 plan with the tax liability of the non filing spouse, even when the liability was joint.

Similarly, if the taxes arose in a business, the IRS may not have recognized that taxes paid by an individual or that individual’s Chapter 13 trustee were on account of business taxes.

What to do?  If a polite letter pointing out that the tax has been paid doesn’t fix the problem, the collection actions violate the discharge injunction in the bankruptcy case.  Brought to the attention of a bankruptcy judge, the IRS may get its knuckles rapped and be ordered to pay your attorneys fees and any damages you suffered.

IRS doesn’t understand the community property discharge

The Bankruptcy Code has been around in its present form for nearly 40 years, but the IRS can’t get its head around the community property discharge found in §524(a)(3).

That statute says that the bankruptcy discharge granted to one spouse protects a couple’s community property acquired after the bankruptcy filing from debts discharged in bankruptcy.

So, taxes discharged in one spouse’s bankruptcy can’t be collected from the community property of the spouse who didn’t file. (The non filing spouse may be exposed to collection if that spouse has separate property and is also liable for the tax).

What to do?  Start by educating the IRS.  Point out that your spouse has a discharge, you remain married, and your community property is protected from pre bankruptcy tax collection.  This one is trickier, since the IRS has legitimate rights to collect from separate property, if there is any.

You miscounted the passage of time

Consider whether the mistake might be yours.  The bankruptcy discharge doesn’t list the debts discharged in your case;  it simply says that the dischargeable debts are discharged.

The central factor controlling whether the unsecured portion of a tax is discharged is the interval between the assessment of the tax and the filing of the bankruptcy.  The calculation can be complicated by prior bankruptcy filings and other events that pause the clock.

What to do?  Get an experienced bankruptcy attorney or a tax professional to review whether the tax the IRS wants to collect was really discharged.  If it was discharged, go back to court for help from a bankruptcy judge.

IRS simply screwed up

It happens these days more than it used to.

The IRS is understaffed and technologically challenged.  They make mistakes.

If the IRS, or any other taxing authority, had notice of the bankruptcy filing, they are legally obligated to honor the discharge, even if it’s hard to do.

What to do?  First off, write a letter with the proof that the taxes are discharged.  Usually that means sending a copy of the bankruptcy schedules listing the IRS and a copy of the discharge along with the collection letter they just sent.  Most bankruptcy judges want you to give the offending creditor a chance to fix the problem before running back to court.  You set yourself up for a better result in court when you’ve made a business-like attempt at self help and been brushed off.

Bottom line

The bankruptcy discharge does apply to taxing authorities.  Just because it’s the IRS doesn’t mean they are right.

More

Discharging taxes in bankruptcy

Debt collectors after your discharge

Who to pay after bankruptcy

 

Tax Deductions Hidden In Chapter 13

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taxesDon’t miss the tax deductions hiding in your Chapter 13 plan payments.

The same, very important debts that your Chapter 13 plan pays are often tax deductible.

And you are still the person who’s paying, even if the trustee writes the check.

Deductions in bankruptcy

Let’s look at some common deductions lurking in the Chapter 13 disbursements.

Mortgage interest  If your Chapter 13 plan is catching up on delinquent mortgage payments, the claim of the lender is probably mostly interest.

Taxes  Property taxes paid through the plan should be deductible.  Likewise, state income taxes paid by the trustee are deductible.

 Business expenses  If you operate a business in Chapter 13 or operated one before you filed, you may be paying business leases, sales taxes, or vendor debt through the plan.

Get the info you need

In my experience, you have to dig out the information on deductible payments;  I have not seen lenders sending 1098’s reporting mortgage interest paid to debtors when the checks come from the trustee.

Step by step to claiming the mortgage interest deduction

But most if not all Chapter 13 trustees are on the web, and debtors can access the trustees reports of which creditors have been paid this year.

Pull up the report of last year’s disbursements and flag the payments that are deductible.

Save the printout of the trustee’s report in case of question  by the taxing authority.  The IRS will not have gotten a matching report from the lender who got the money and hasn’t reported it to you and the IRS.

How to treat 1099’s on foreclosures and short sales

Go back to prior tax years

If your plan is paying deductible expenses and you’ve been in the bankruptcy case for several years, you may want to look at prior year trustee reports.  Overlooked deductions might justify going back to amend a prior return.

Tax returns are generally amendable for three years.

Check it out

Take this post with a grain of salt, or rather, take it to a tax professional.

I am a bankruptcy lawyer and what I know about taxes, I’ve learned on the job.  But I am convinced that Chapter 13 debtors are missing legitimate tax deductions by overlooking what the Chapter 13 trustee has paid on their behalf.

What your tax professional should know about tax and bankruptcy

Image courtesy of 401(k)calculator.org

Cut Tax Penalties In Bankruptcy

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redwood-pixabay_opt

Get in tax trouble and the penalties often grow huge.

What starts as a manageable problem can soon tower over you.

Breathe deep;  there is a solution.

Chapter 13 bankruptcy can cut tax penalties down to size.

All tax penalties discharged in 13

Old or new, large or small, Chapter 13 discharges all unsecured tax penalties.

In contrast, Chapter 7 discharges some tax penalties.

 Discharged are penalties for taxes that are themselves dischargeable.

Also dischargeable in Chapter 7 are penalties where the transaction or event that triggered the tax occurred more than three years before filing, whether or not the tax itself is dischargeable.  523(a)(7)(B).

That’s good, but if you are eligible, Chapter 13 is better.  All penalties are discharged.

Who can file Chapter 13

Chapter 13 is available to individuals (no corporations or LLC’s), with regular income, whose debts total less than the caps for secured and unsecured claims.

You know if you are a real person and whether you have regular income, so the thing that needs analysis is the allocation of your debts between those that are unsecured (the creditor has no lien on your assets) versus the debts for which there is a lien.

To be a secured claim in bankruptcy, that lien has to attach to an asset that has market value greater than any liens senior to it.

Tax liens don’t go to the head of the line just because they are debts owed to the government.  They fall in line behind any other lien holder who perfected their lien before.

Recent taxes must be paid

Chapter 13 plans are written by the person who has filed the bankruptcy case.  The Bankruptcy Code requires, however, that recent income taxes be paid in full through the plan.

Note that it is the TAX and the INTEREST on that tax that have to be paid during the life of the Chapter 13.

Penalties get treated just like personal loans, medical bills, and credit card debt:  what that class of creditors gets in the Chapter 13 is driven by the means test and the best interests of creditors test.   In most Chapter 13 plans, that’s little, or nothing.

Chapter 13 cuts those penalties down to size.

Tax liens whittled down

toothpicks-pixabay_optThe discussion above deals with unsecured taxes and tax penalties.  The rules change when a tax lien is filed.

At its simplest, a Chapter 7 discharge eliminates the IRS’s ability to levy your bank account or garnish your wages for taxes that have been discharged.

However, the Chapter 7 discharge doesn’t alter any tax lien recorded before the bankruptcy, even if the taxes themselves are discharged.

If the tax liability is discharged, any lien in place will not attach to assets you acquire after your bankruptcy is filed.

More about tax liens after bankruptcy

Chapter 13 does alter tax liens.  (See why I’m a fan of 13?)

Chapter 13 treats as a secured claim only that part of a lien that attaches to real value in the taxpayer’s assets.

Put bluntly, if you don’t have any assets, then the lien is worthless and will be voided at the conclusion of your Chapter 13 plan.

Oh, technically,  the tax lien may attach to your household goods, all right.  But those things have very little market value.

Pay the resale value of your pots and pans through the Chapter 13 plan, and the lien is deemed satisfied.

If you can’t cut a deal with the IRS that eliminates the tax penalties as part of an offer in compromise or payment plan, you have bankruptcy options for tax penalties.

More about Chapter 13

Get rid of credit card balances without paying interest

Why Chapter 13 Plans Fail

How Chapter 13 Works

Images courtesy of Pixabay. 

 

Stop Making Quarterly Tax Payments

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quarterly tax paymentUncle Sam expects a quarterly tax payment from the self employed since you don’t issue yourself a paycheck with regular tax withholding.

Make this the last quarterly tax payment you pay.

Seriously.  Don’t make any quarterly payments for this coming year.

Think I’m advocating tax resistance?  No way.

The tax collectors  have more weapons than you want to encounter.  It’s like the advice from the era of newspapers:  don’t pick a fight with someone who buys ink by the barrel;  

Don’t spit in the face of the tax man.

Give up making them quarterly, I say.

Pay taxes monthly, just like every other recurring bill in your life.

Folks who get a paycheck have their income tax liability, or at least some estimate of that liability, deducted from each paycheck.  No fuss, and, well,  only some bother.

Their take home pay has already paid the taxes.  The paycheck is what is available to pay the bills.

Not so the self employed.

We are expected to make quarterly estimated tax payments in January, April, July, and October.

I’m sure the quarterly arrangement was seen as a convenience when instituted.

But it’s not necessarily convenient.  You have to set aside money regularly so you have a fistful come quarter day.

If you free lance or run a small business, budgeting may be the hardest think you do.  Who knows, in this economy, how much you’ll make this quarter, or how you’re going to pay the bills?

Quarterly payments invite us to fudge.

Get caught not having prepaid enough and you get  hit with penalties.

Get really behind, and it’s tax liens and levies.

Pay this year’s taxes monthly

My charge?  Add Uncle Sam to your list of creditors that you pay monthly.

Most creditors expect monthly payment:  the rent, the car payment, the credit card.  Add your estimated taxes to that list.

Income taxes are a cost of doing business.  No reason not to pay them as you go, just like the folks on salary do.

  • You avoid the need to set up a separate savings account in which to accumulate the taxes to be paid quarterly.
  • You resist the temptation to use those savings for some intervening crisis.
  • You escape the urge to make no provision “just this month”.

Making regular and smaller payments makes it easier to get the total bill paid in a manner that avoids penalties for not paying regularly.

Send your monthly income tax prepayment to the same place the quarterlies were headed.  Write on your check your Social Security number and “estimated 2017  tax liability”.

Take care of taxes monthly and you don’t find yourself in a tax hole come next April.

Here’s the IRS  on making estimated tax payments.

More on taxes

Unfiled taxes live forever

Dig out of payroll tax trouble

Getting rid of tax liens

Image courtesy of Wikimedia.

Audited? Did You Tell The State Tax Authorities?

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tax audit

We’re all about sharing these days, aren’t we?  So, did you share with the state tax authorities the outcome of your IRS audit?

While telling the Franchise Tax Board that you owe more taxes to the feds may seem like inviting trouble, you gain by doing so.

How?

You set those taxes owed to California up for discharge in bankruptcy.

And that’s a nice card to have up your sleeve.

Here’s why.

Taxes discharged in bankruptcy

A central requirement to wipe out tax liability in bankruptcy is the filing of a return.  Bankruptcy Code 523(a).

Taxes that are unassessed but still legally assessable when you file your bankruptcy case don’t get discharged.

If you owe more taxes as a result of an IRS audit, bankruptcy law treats any resulting increase in your state tax liability as one for which you haven’t filed a return.  That is, unless you have made a report or filed an amended tax return with the state.

No return or report, no discharge of the state tax increase.

Tax exposure under California law

California law requires that you share the results of a tax audit that increases your taxes to the Franchise Tax Board.

Edited for clarity, Revenue & Taxation Code 18622 provides:

(a) If any item required to be shown on a federal tax return, including any gross income, deduction, penalty, credit, or tax for any year of any taxpayer is changed or corrected by the Commissioner of Internal Revenue …, that taxpayer shall report each change or correction…, within six months after the date of each final federal determination of the change or correction or renegotiation, or as required by the Franchise Tax Board, and shall concede the accuracy of the determination or state wherein it is erroneous. For any individual …changes or corrections need not be reported unless they increase the amount of tax payable …for any year.

(b) Any taxpayer filing an amended return with the Commissioner of Internal Revenue shall also file within six months thereafter an amended return with the Franchise Tax Board…  For any individual …, an amended return need not be filed unless the change therein would increase the amount of tax payable…

So, if changes to elements of your return by reason of an IRS audit would result in you owing more state tax, you have to report that change to the FTB.  If you are required to file an amended federal return, you have six months to file an amended state tax return if you owe more state tax as a result of the audit.

Reporting requirement in other states

California isn’t alone in requiring you to share the audit bad news with the state.  The AICPA organization of CPA’s put out this summary of tax audit reporting requirements nationwide.

More on taxes in bankruptcy

Timing is everything when discharging taxes

Tax liens after bankruptcy

Chapter 13 is a tax tool

Bail Yourself Out Of Payroll Tax Trouble

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Business owners with unpaid payroll taxes are in deep trouble.

There’s no corporate shield when it comes to payroll taxes. Even if the employer is a corporation, the corporation’s managers are personally liable for the trust fund portion of unpaid payroll taxes.

The trust fund portion of the tax (the amount withheld from employees’ checks) can be assessed against anyone  who could have paid that money  to the IRS.

You are in the IRS’s cross hairs, personally, if the business hands out “net” checks to employees with sending the withheld money in.  A bankruptcy discharge is no help here. [Read more…]

Free Tax Preparation Offered In Bay Area

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Households with an annual income of $54,000 or less can have their tax returns prepared for free through the United Way’s Earn It, Keep It, Save It program.

Too many Californians – far too many here in the Bay Area – work hard yet find themselves unable to meet their most basic needs. Furthermore, tax season can be stressful time for many people, as they round up tax documents and receipts, and make sense of confusing tax forms. Those of us who can afford it may pay for tax software that walks us through the process, or we may pay a tax preparer to file on our behalf. But the cost for paid preparers can be costly, and tax software varies widely in price. For low-income families who may not be able to afford these services, tax time can be a significant source of stress, and securing a full refund is not assured. Additionally, many of these families face additional challenges in doing their own taxes –English may not be their primary language or they may have limited computer skills. This is why EKS is so important in our community.

Find a location near you.

Interactive map

Print list of locations

Earned Income Tax Credit

The Earn It, Keep It, Save It campaign is particularly focused on enabling qualifying individuals and families to access this tax credit that stands to put real money in the pockets of working families.

Too many families miss claiming the EITC.  Something like 20% of the families that are eligible fail to take advantage of this support for low and moderate income folks.

Even if you owe no taxes, you can claim the tax credit and receive a check.

Generally, the lower your income and the more children you have, the larger the payment you’re entitled to.

California puts money in pockets, too

California has a state version of the Earned Income Tax Credit.  The California rules are set out in this fact sheet from the Franchise Tax Board.

The Flat Wrong 1099

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credit-squeeze-transparentWhen her soon-to-be-ex filed bankruptcy, my client got a 1099-C for the joint credit card.

The form claimed that the debt was cancelled.

Therefore, she had additional income equal to the card balance.

Only, none of the statements on the 1099 were true.

The debt wasn’t discharged as to the non filing spouse.  One spouse’s discharge does not discharge the personal liability of anyone else.

Further, the liability of the soon-to-be-ex wasn’t even discharged yet since it was the beginning of a 3 year Chapter 13.

The discharge doesn’t come until all the plan payments are made.

What to do?

Cancelled debt and taxes

Tax law requires the holder of a debt that is forgiven to report the forgiveness to the IRS.

The forgiveness can be voluntary, as in, we compromised the debt and now you owe less.

Or, it can be by operation of law:  you filed bankruptcy and discharged the debt.

Either way, the tax man sees the amount of money that you no longer owe as if it were cash income.

And, if it’s income, then you owe tax on the income.

No tax in bankruptcy

If my client was the spouse who had filed bankruptcy, she would properly have gotten a 1099-C, at the end of the case.  When the debt was truly gone.

But she wouldn’t have owed tax on the discharged debt, because bankruptcy is an exception to the rule.

Debt forgiven in any chapter of bankruptcy does not trigger cancellation of debt income.  Therefore, no tax.

Tax treatment of cancelled debt is one of the sterling features of bankruptcy that make it superior to debt settlement.

Attacking the erroneous 1099

Strike first, is my thought, when the 1099 is wrong.

The credit card company issued the defective 1099. Write the issuer and request an amended 1099.

The deadline for sending out 1099’s is about six weeks earlier than the deadline for submitting the 1099’s to the IRS.

Jump on the problem right away and attempt to correct the situation before it gets to the IRS.

When the IRS gets bad information

If you couldn’t head off a submission to the IRS that was wrong, tackle the problem in your tax return.

You can’t just file the return as if the IRS didn’t think you had this  extra “income”.  You have to address the error and overcome it.

The IRS has a form for claiming an exception to the cancellation of debt income rule:  Form 982.

Attach your explanation of why the 1099 is wrong to the 982.  There isn’t a box, or an “other” category on the form where you can provide further information, so you’ll have to attach your explanation to the form.

If not resolved at the issuer level, my client will have to point out that she hasn’t been relieved of the debt, since she hasn’t filed the bankruptcy AND that her spouse hasn’t yet been relieved of the debt yet either, as there is no discharge.

Wash, rinse and repeat

I’ve spoken as though the IRS was the sole taxing authority involved.

If you live in a state with an income tax, you must repeat the drill described for the IRS with your state tax agency.

Personal liability required

Probably the most common error in issuing 1099’s is the matter of personal liability.  If the debt cancelled was non-recourse, the borrower had no personal liability in the first place.

Cancellation of a non recourse debt doesn’t alter the borrower’s balance sheet.  The borrower wasn’t personally liable before cancellation, so there’s no cancellation of debt income to address.  More on the fictional 1099.

As I said, see above and wash, rinse and repeat.

More on tax

Discharging taxes in bankruptcy

Tax liens after bankruptcy

When tax debt is a life sentence

 

Bankruptcy Busts Taxes If The Timing Is Right

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taxes dischargeable

Got unpaid taxes for 2014?  April 17, 2018  those taxes reached the end of the line as priority claims in bankruptcy.

They lose their protected status and can be discharged in bankruptcy.

Discharged, as in, no longer a personal liability.  No longer entitling the IRS to levy and garnish because of a bankruptcy discharge.

Taxes are collectible for 10 years from assessment, outside of bankruptcy.

That’s the view from 30,000 feet on discharging taxes in bankruptcy.  Let’s look at the details and see why  April 17th  is important if you have old taxes you haven’t paid.

Assuming you filed your 2014 return by the April deadline.  If you got an extension, the date is October 16, 2018.

Three rules govern discharge of taxes

To wipe out taxes in bankruptcy, three rules must be met.  The first one, the “three year rule”, says taxes can’t be discharged until three years have passed since the tax return was last due.

Taxes newer than that are priority claims.  Priority tax claims aren’t dischargeable.

There are a couple of wrinkles in the three year rule.

First, the rule starts running from the day on which the tax return was last due without penalty.  Without an extension of time to file, that’s usually April 15th.

So, the return for 2014 was due April 15, 2015.  You start counting from then.

Unless you got an an extension, 2014 taxes became dischargeable in bankruptcy on April 16 of this year.

Tax filing date doesn’t matter

Filing your tax return before the deadline doesn’t get you a head start on the three year rule.

Even if you got an extension and actually filed your return in June, the controlling rule still starts counting from the last day on which you could have filed the return:  October 15th.

Other bankruptcy rules apply

The other two rules governing discharge of taxes still have to be met.

The “two year rule” says that if the tax wasn’t filed on time, it has to have been on file for at least two years to be discharged in bankruptcy.  So, even taxes where the three year rule is met don’t go away in bankruptcy if the return was late and hasn’t been on file for two years.

The the “240 day rule” says that taxes assessed within 240 days of the bankruptcy filing aren’t discharged, even if the other two rules are met.

Tax year must be closed

There’s an additional strategic issue involving taxes and bankruptcy in Chapter 13.  A Chapter 13 plan can provide for payment of taxes  that aren’t dischargeable over the life of the Chapter 13 plan.

But, BUT, the tax year must be complete in order to include the tax in the payment plan.  So, if you file in October, 2018 to discharge 2014 taxes, any tax you may owe for 2018 won’t be included in the bankruptcy case.

Depending on the amount you expect to owe for this year, you may be well advised to wait til January 2, 2019 to file your bankruptcy case.

The important point is well-advised.  Discharging taxes in bankruptcy is highly detailed.  Get good advice from an experienced bankruptcy attorney.

More about taxes in bankruptcy

Tax liens after bankruptcy

What about unfiled tax returns

Chapter 13 is a tax tool

 

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