Can You File Bankruptcy on Back Taxes: Understanding Your Options


Explore the complexities of filing bankruptcy on back taxes with Henkels & Baker PC. Understand your options, implications, and the guidance we offer.

Understanding Bankruptcy and Back Taxes

Regarding the complexities of back taxes and the possibility of bankruptcy, at Henkels & Baker, PC, we stand ready to guide you through every step. Our legal skills in debt and bankruptcy law allow us to provide a clear path forward for those burdened by tax debt.

Bankruptcy offers a form of relief known as an automatic stay, which halts most collection activities, per Section 362 of the US Bankruptcy Code. This can offer immediate relief from the stressful pressure of unpaid taxes and tax debts, but it’s crucial to understand the rules laid out by the Bankruptcy Code.

Specifically, Chapter 13 bankruptcy may allow for the organization of tax debt into a manageable repayment plan. Unlike other debts, certain tax obligations require careful handling:

  • Tax Obligations: Regular tax returns must continue to be filed, and new taxes must be paid during bankruptcy.
  • Discharge: Some back taxes may be discharged, depending on factors such as tax debt age and filing status.
  • Centralized Insolvency Operation: This division of the IRS coordinates with the bankruptcy court to deal with tax-related matters.

For detailed guidance, Publication 908 by the IRS provides a wealth of information on bankruptcy-related tax issues.

Finally, remember that not all tax debts can be resolved through bankruptcy. To understand your specific situation, consulting with a skilled attorney is essential. We’ve been at the forefront of this field, combining over 50 years of experience with a deep commitment to client care. Bankruptcy looms as a daunting prospect, but remember, a fresh start is possible, and we make it easier. Trust us to help you evaluate your options and find a tailored solution that puts you on the road to financial recovery.

Can You Include Back Taxes in Bankruptcy?

At Henkels & Baker, PC, we understand that dealing with back taxes can be daunting, especially when coupled with financial challenges. When our clients ask us if bankruptcy can help with their tax debts, we guide them through the complexities, as the ability to discharge IRS tax debt depends on several factors. When evaluating tax obligations, the IRS considers various factors, including the type of tax owed, the due date, and the assessment date.

Overview of rules for including taxes in the bankruptcy petition filings:

  • Tax Returns: Filing accurate and timely tax returns is crucial. Tax returns for the related years must have been filed to consider discharging any tax debt in bankruptcy.
  • Tax Assessment: The debt must have been assessed by the tax agency at least 240 days before filing for bankruptcy.
  • Debt Age: To be dischargeable, the tax debt should typically be from a return due at least three years ago.

Exceptions and special circumstances include:

  • Tax Lien: Discharging tax debt will not remove a prior legitimate tax lien placed on the property.
  • Recent Tax Debts: Debts from recent tax periods often cannot be included.

Types of Taxes and Dischargability

Our experience at Henkels & Baker, PC has taught us that not all taxes are treated equally in bankruptcy:

  • Federal and State Income Taxes: These may be dischargeable if specific criteria are met, including the three-year rule, two-year rule, and 240-day rule, as outlined in 11 USC § 523(a)(1).
  • Local Taxes: The dischargeability can vary and usually requires a detailed analysis.
  • Trust Fund Taxes: Typically, these do not include dischargeable debt in bankruptcy.

Every situation is unique. Although some may find relief through an IRS payment plan or an offer in compromise, others benefit from the fresh start bankruptcy provides. Our goal at Henkels & Baker, PC is not to push for bankruptcy but to find the best solution for your financial future – because we believe a fresh start is possible and make it easier!

Types of Bankruptcy and Taxes

Tax debts can be particularly burdensome when you’re grappling with financial difficulties. At Henkels & Baker, PC, we help clients understand how various types of bankruptcy may impact their tax liabilities.

Chapter 7 Bankruptcy

Chapter 7 Bankruptcy allows for the discharge of certain debts. Under Title 11 of the Bankruptcy Code (Section 727(a)), debtors can obtain a discharge of debts in Chapter 7 bankruptcy. It’s crucial to know that while income taxes older than three years may be discharged, there are specific prerequisites, such as filing income tax returns on time and the taxes not being fraudulent. Tax liens, however, are not discharged, meaning that secured tax debts will remain a lien on your property.

Chapter 13 Bankruptcy

Chapter 13 Bankruptcy, a reorganization plan, allows individuals to repay some of their debts, including priority tax debts, over time. Any income taxes you owe could be incorporated into the repayment plan managed by a trustee. This approach to eliminating tax debt doesn’t discharge taxes but instead gives you a manageable way to catch up on tax debt. It’s beneficial for family farmers or fishermen with seasonal income variations that Chapter 13 can accommodate.

Chapter 11 Bankruptcy

Chapter 11 Bankruptcy, often used by businesses, may also apply to some individuals. This type allows for a debt restructuring, and unsecured tax debts can sometimes be reduced. Like Chapter 13, priority debts tend to be paid in full, and tax liens might persist post-bankruptcy.

Chapter 12, Bankruptcy

Lastly, Chapter 12, Bankruptcy, is designed for family farmers and fishermen. It functions similarly to Chapter 13 but is tailored to fit the unique income streams and challenges faced by those in the farming and fishing industries.

Should you have concerns about your tax debts and bankruptcy, our firm’s Chapter 13 bankruptcy attorney can provide the guidance you need. We’re here to help you evaluate your situation and find a viable path to financial relief. Remember, regardless of the complexity of your financial situation, a fresh start is possible and more straightforward than you might think.

Frequently Asked Questions

Can Back Taxes Be Included in a Bankruptcy Filing?

 Yes, back taxes may be dischargeable under certain circumstances in a bankruptcy case. The specific criteria depend on the nature of the tax, the debt age, and the Bankruptcy Code chapter under which you file.

What Happens to the Tax Refund Refunds in Bankruptcy?

 In bankruptcy, tax refunds can become part of the bankruptcy estate. Depending on your case, refunds may be subject to withholding to pay creditors or may be partially or entirely offset against what you owe.

Are Penalties and Interest Dischargeable?

 Penalties and interest associated with back taxes can often be discharged as part of bankruptcy, following USC § 727(b). However, if the underlying tax is not dischargeable, the associated penalty may not be either.

What About Tax Fraud Cases?

 Taxes related to fraud or willful evasion are not dischargeable in bankruptcy. Full, truthful disclosure of all debts and assets is critical in filing for bankruptcy.

Can Corporations and Partnerships File Bankruptcy on Federal Income Taxes?

 Yes, partnerships and corporations may file for bankruptcy, including taxes owed. The specifics will depend on the chapter under which the business files.

Are International Cases Treated Differently?

 International cases can present unique challenges and may require additional analysis. Our team is equipped to handle complex cases which involve municipalities or international issues.

At Henkels & Baker, PC, we understand that facing back taxes can be daunting. Our experience as tax professionals lends us the confidence to assist you through these intricate matters with the respect and attention you deserve.

Henkels & Baker PC’s Approach to Bankruptcy and Back Taxes

At Henkels & Baker PC, we understand the complexities of bankruptcy and back taxes. We’ve honed a robust approach that respects the gravity of a client’s financial situation while focusing on a viable path forward.

Here are the steps we take in our clients’ bankruptcy cases:

  • Tax Preparation and Forms: Our extensive experience includes guiding clients through accurate tax preparation and ensuring all relevant tax forms are meticulously completed to avoid complications during bankruptcy proceedings.
  • Tax Assessments and Returns: In cases involving tax assessment disputes or nondischargeable priority debt, we review valid tax returns and transcripts to help clarify our clients’ tax accounts.
  • Employment and Property Taxes: When dealing with employment or property taxes, we recognize the nuances that make these typically nondischargeable. However, precise evaluation may lead to different outcomes.
  • Collection Actions and Liens: We assist in mitigating collection actions and aim to address any Notice of Federal Tax Lien (NFTL) to protect your assets.
  • Audits and Deficiencies: In the face of a tax audit or notice of deficiency, we harness our experience to represent and support our clients diligently.
  • Discharging Tax Debt: While discharging tax debt in bankruptcy is complex, our adept movement through filing a motion may allow certain tax debts to be resolved in a bankruptcy case.
  • Substitute Returns and S Corporations: For a substitute tax return, cases, or issues relating to S corporations, we analyze the specifics and strategize accordingly, armed with our bankruptcy tax guide.
  • Delinquent Returns: We help clear the haze around delinquent returns to clear tax debt where allowable under law, including some instances related to Form 1040.

Take the First Step Towards Your Financial Fresh Start

If the weight of tax debt feels overwhelming, it’s important to remember that solutions are available. The path to financial stability may seem daunting, but you can navigate it with others. We invite you to learn about the process for filing bankruptcy and discover the personalized strategies we tailor for our clients. Each case is unique, and we stand ready to provide the professional guidance you need. Contact us—a fresh start is possible, and we make it easier.

Client Reviews

Mark F.

Dustin was Excellent – professional, thoughtful, empathetic. Would definitely refer him to others.

Liz P.

The care and knowledge I received before and during my bankruptcy with your firm was 100% helpful.