Boca Raton Bankruptcy & Taxes Lawyer
For the most part, the rise of the gig economy has been a good thing. Many people turn their free time into revenue-producing time, and some of these people turn their side hustles into full-time gigs. Self-employment also means substantial income peaks and valleys. So, it’s rather easy to fall behind on estimated tax payments. The IRS, which is the world’s largest collection agency, wants that money, and it has the tools to get it.
Since we routinely handle these matters in Palm Beach County and nearby jurisdictions, the dedicated Boca Raton bankruptcy & taxes lawyers at the Law Offices of Stephen Orchard know there is more than one way to favorably resolve delinquent tax debt. The IRS’ Fresh Start Program significantly expanded the relief available to individual taxpayers. Yet even still, these initiatives have limited eligibility requirements. In contrast, almost everyone qualifies for bankruptcy relief.
Back Tax Discharge in a Chapter 7
Financially, income taxes are unsecured debts, like revolving charge accounts and payday loans. Whether they know it or not, taxpayers made a written promise to pay their taxes. However, there is no collateral or other security agreement.
Legally, past-due income taxes are priority unsecured debts. So, like student loans, these obligations are only dischargeable in certain situations. The discharge rules are pretty clear:
- Income Taxes: Past-due property, trust fund, and other taxes are not dischargeable in a Chapter 7. However, as outlined below, these taxes are usually eligible for inclusion in a repayment plan.
- Three Years: The income taxes at issue must be at least three years old. Taxpayer and IRS extensions always change the payment deadline. But these extensions might or might not affect the tax due date for bankruptcy purposes.
- Two Years: The returns at issue must have been on file for at least two years. Only taxpayer-filed returns count toward this requirement. Substitute returns, which the IRS files on the taxpayer’s behalf for accounting purposes, usually don’t count.
- 240 Days: If the IRS has assessed the debt within the last eight months, the obligation is not dischargeable. “Assessment” is an accounting term. Generally, when the IRS sends a letter which includes the total amount due, as opposed to the amount due for a certain year, the IRS assesses the debt.
If the debtor meets all these requirements, the judge eliminates the legal obligation to pay the past-due taxes. However, the collateral consequences of this debt, if any, remain. So, if the IRS filed a lien before Sarah filed bankruptcy, her Boca Raton bankruptcy & taxes attorney must deal with the lien separately, even if the judge discharges the tax debt.
Back Tax Repayment in a Chapter 13
Delinquent priority unsecured debts, including any past-due taxes, are usually allowed claims in a Chapter 13. Therefore, the debtor must include these obligations in the monthly debt consolidation payment. As mentioned, these taxes could be any kind of obligation, and not just income taxes. Even criminal fines are usually allowed claims in a Chapter 13.
As the debtor makes monthly payments, the IRS usually cannot assess penalties and interest. The law in this area is a bit uncertain.
The Automatic Stay usually remains in effect for the entire repayment period. So, taxing authorities cannot send collection letters, pressure debtors to repay their obligations faster, or take any other adverse action.
Some jurisdictions allow Chapter 20 bankruptcies. Let’s go back to Sarah. Now assume she filed Chapter 7, but she did not qualify for an income tax discharge. She may be able to immediately file a Chapter 13. She wouldn’t be eligible for a discharge, but she doesn’t need that relief. She just needs more time to pay the IRS.
Connect with a Dedicated Palm Beach County Bankruptcy Lawyer
If crushing debt is a problem, legal solutions are available. For a free consultation with an experienced Boca Raton bankruptcy & taxes attorney, contact the Law Offices of Stephen Orchard. Convenient payment plans are available.