Income Tax Debt in Bankruptcy

The start of a new year also represents a new tax year and many families feel will feel the increased burden of yet another year of unpaid income tax debt.  Many of our clients are unable to pay down their past due taxes or meet the minimum amount of the IRS’s payment plan. Fortunately, there are a number of options through bankruptcy that can reduce or eliminate your income tax burden altogether.

Totally eliminate your income tax debt

Through a Chapter 7 bankruptcy, you can eliminate your income tax debt if you meet the following requirements:

  • You did not commit fraud or tax evasion
  • Three Year Rule: Your tax debt is over three years old. The due date for filing the return for the tax year in question is more than three years old. This period is determined by the most recent date the tax return is due for the tax year. If you filed an extension for the return it will delay the start time for those three years. In short, as of January 1, 2015, your income tax debt from 2010 and earlier can be wiped out.
  • Two Year Rule: You filed a tax return two years before you file bankruptcy: At least two years preceding the filing date of your bankruptcy you must have filed a return or equivalent report. For example, if you file your bankruptcy on January 1, 2015, your 2010 taxes must have been filed before January 3, 2013.
  • 240 Day Rule: The taxes were assessed at least 240 days prior to the filing.

Pay off your income tax debt on a court ordered payment plan

Even if you don’t meet the above requirements to eliminate your tax debt, a Chapter 13 payment plan will still provide many benefits to individuals. First and foremost, Chapter 13 will provide relief from collection efforts from taxing authorities and may prevent the addition of penalties and interest.  In a Chapter 13 plan, the tax debt can be paid over a five year period.  Further, any penalties and post-petition interest on the taxes will be deemed unsecured and not required to be paid through the plan.

An Attorney will guide you through the process

Although the above guidelines can provide a framework for an individual to eliminate or reduce their tax debt, it is important to work with a licensed Michigan bankruptcy attorney to guide you through the process. At Detroit Lawyers, PLLC we will obtain an IRS transcript of your tax debt. The transcript will be used to determine when your returns were due, when your returns were file; and if you were audited, which increases the tolling period.

Take back the power

If you owe large amounts of income tax debt, you know the burden of receiving phone calls and letters with multiple years of unpaid taxes. Often, interest and penalties add up increasing the amount owed. By consulting with an attorney and using a form of bankruptcy, you can take back the power and subject the IRS to the rules and regulations of the court system.