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How To Wipe Out Tax Penalties In Bankruptcy

By Cathy Moran

217/365 August 5 - Found Money

Tax penalties seem like a further insult when you’re having trouble paying the tax itself.

Everything seems subject to an additional penalty:  failure to file timely;  failure to pre pay sufficiently;  failure to be accurate.

They mount up quickly, often equaling the unpaid tax.

Bankruptcy can not only eliminate your liability for certain taxes, it can wipe out the tax penalties as well.

Here’s how it works.

Three rules for discharging tax penalties

Penalties for dischargeable taxes are dischargeable

Tax penalties are tied to a particular tax year.  If the tax for that year is dischargeable in bankruptcy, the discharge wipes out the penalties too.

The formula for a dischargeable tax, roughly speaking, says you can get rid of an unsecured tax if  1) the return for that year was due more than three years before the bankruptcy was filed;  2) if the return wasn’t filed on time, it’s been on file for at least two years; and 3) the tax for that year was assessed at least 240 days before bankruptcy.

Discharge the tax, discharge the penalty.

Penalties tied to events more than three years before filing are dischargeable

If the failure that triggered the penalty happened more than three years before filing, the penalty is dischargeable.

It’s dischargeable even if the the tax for that year isn’t dischargeable, for instance, because the returns weren’t filed on time. see 11 U.S.C. 523(a)(7).

All tax penalties wiped out in Chapter 13

That’s right:  all tax penalties are discharged by a Chapter 13 discharge. Hard to beat, right?

Chapter 13 requires that you pay in full the priority taxes and the interest that accrued up to the date the bankruptcy case was filed.  But at the end of the case, all tax penalties are wiped out, even on the priority taxes.  More on taxes in Chapter 13.

Fraught with rules

So much of discharging taxes depends on knowing the maze of rules that apply to taxes in bankruptcy.  It’s critical to get a tax transcript to verify the dates of all the important transactions.

Get experienced legal help if you want to discharge taxes and tax penalties.  This is not the time or place for the cheapest or closest bankruptcy lawyer in town.

More

Discharging taxes in bankruptcy

What should bankruptcy cost?

Tax liens and bankruptcy

Image courtesy Flickr and Sharon Drummond

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Filed Under: Consumer Rights

About Cathy Moran

I'm a veteran bankruptcy lawyer and consumer advocate in California's Silicon Valley. I write, teach, and speak in the hopes of expanding understanding of how bankruptcy can make life better in a family's future.

Bankruptcy Basics

About The Soapbox

You’ve arrived at the Bankruptcy Soapbox, a resource of bankruptcy information and consumer law.

Soapbox is a companion site to Bankruptcy in Brief, where I try to be largely explanatory and even handed (Note I said “try”).

Here, I allow myself to tell stories and express strong opinions. We dig deeper into how to consider bankruptcy and navigate a bankruptcy case.

Moran Law Group
Bankruptcy specialists for individuals and small businesses in the San Francisco Bay Area

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