Some taxes are discharged in bankruptcy.
Goldstein Bershad & Fried, PC, is frequently involved in seeking relief for our clients from federal and state taxes. While tax payment installments can be forced on taxing authorities through chapter 11 and 13, often the simplest and least expensive solution is discharging the personal income taxes in chapter 7.
Individual Income Tax: Yes! Personal income tax liability, both state and federal, can be discharged in a bankruptcy if they were last due, including extensions, more than three years before the bankruptcy is filed AND the tax return was filed more than two years before the bankruptcy is filed.
Business Tax: Maybe! Individuals in control of a business can be personally liable for certain kinds of federal and state business related tax even if the business is a corporation or limited liability company. Of course, there is personal liability for all debts, taxes and otherwise, for individuals doing business as a sole proprietorship or partnership. Virtually all taxes except withholding tax can be discharged in a bankruptcy. To be discharged, the same two year and three year rules described above will apply.
What if the taxes can't be discharged? You can still get help in the Bankruptcy Court. In a chapter 11 or chapter 13 bankruptcy, you can force the taxing authority to accept installment payments of tax.
What are the tax advantages?
Tax debt is a large part of our business insolvency practice at Goldstein Bershad & Fried, PC, All taxes can be managed fairly effectively in bankruptcy:
Chapter 11 installments. There is no better way to deal with tax problems than in a chapter 11. Unsecured taxes can be paid over six years from date of Plan confirmation. Secured taxes (tax liens) can be paid over a longer period (10 years?) under a Plan, but then the IRS gets to vote on the Plan. This is always a better deal than you can get from the revenue officer.
Chapter 13 installments. In chapter 13, taxes may be paid over the life of the Plan - up to 5 years with a balloon at the end.
Discharge taxes. Income taxes can be discharged if the returns were last due more than 3 years before bankruptcy, and the returns were actually filed more than 2 years before bankruptcy.
Shift taxes. Income taxes can be shifted from the debtor to the trustee in a chapter 7 in a foreclosure situation. If the bank forecloses outside bankruptcy, it's income to the debtor. If the trustee sells the property, it's income to the bankruptcy estate, not the debtor. Must file before the foreclosure sale.
Second bite - missed deadlines. Have you been assessed withholding tax and now it's too late to file a protest? Is the IRS busy collecting? Get a second bite at the tax apple: the bankruptcy judge has authority to determine taxes even though the time limit for objecting to the IRS has passed. A chapter 7 will stop the IRS collections while the judge considers whether the assessment was proper. Doesn't apply if the issue was already litigated pre-petition.