Introduction
Bankruptcy and taxes are two complex and often overwhelming topics that can have a significant impact on individuals and businesses. Understanding the relationship between bankruptcy and taxes is crucial for those facing financial difficulties. In this article, we will delve into the intricacies of bankruptcy and its effects on taxes, highlighting what changes and what remains the same.
Bankruptcy and Taxes: An Overview
Bankruptcy Basics: Bankruptcy is a legal process that provides individuals and businesses with a fresh start by eliminating or restructuring their debts. It is governed by federal law and offers different types of bankruptcy, such as Chapter 7 and Chapter 13 for individuals, and Chapter 11 for businesses.
Types of Taxes: Taxes can be broadly categorized into two types: priority and non-priority taxes. Priority taxes include income taxes, payroll taxes, and certain other taxes owed to government agencies. Non-priority taxes encompass property taxes and other taxes that are not directly related to government agencies.
What Changes in Bankruptcy?
Discharge of Certain Tax Debts: While bankruptcy can provide relief from many types of debts, not all tax debts are dischargeable. Income tax debts can be discharged if they meet specific criteria. The tax debt must be related to a tax return that was due at least three years before filing for bankruptcy, and the tax return must have been filed at least two years before filing. Additionally, the IRS must have assessed the tax at least 240 days before filing. It is important to note that fraudulent tax returns or tax evasion cannot be discharged through bankruptcy.
Automatic Stay: One significant change that occurs when filing for bankruptcy is the automatic stay. This legal provision halts most collection activities, including actions by the IRS or other tax authorities. The automatic stay provides individuals and businesses with temporary relief from tax collection efforts, giving them time to reorganize their finances or liquidate assets.
Repayment Plans: In Chapter 13 bankruptcy, individuals can create a repayment plan to pay off their debts, including tax debts, over a three to five-year period. This allows individuals to catch up on their tax obligations while keeping their assets. However, it is important to note that the repayment plan must include full payment of priority tax debts.
What Doesn’t Change in Bankruptcy?
Non-Dischargeable Taxes: While some tax debts can be discharged, certain tax obligations are non-dischargeable. These include tax liens, trust fund taxes, and other tax debts that are deemed to be in the public interest. Non-dischargeable tax debts survive bankruptcy and must be paid in full.
Future Tax Obligations: Bankruptcy does not absolve individuals or businesses from their future tax obligations. It is essential to continue filing tax returns and paying taxes as required by law, even during and after bankruptcy. Failure to do so can result in new tax debts that are not dischargeable.
Conclusion
Bankruptcy and taxes are complex areas of law that intersect in various ways. While bankruptcy can provide relief and discharge certain tax debts, it is crucial to understand the specific rules and requirements. Not all tax debts are dischargeable, and future tax obligations remain unaffected by bankruptcy. Seeking professional advice from bankruptcy attorneys and tax professionals is highly recommended to navigate these intricate matters successfully.
References
1. irs.gov
2. uscourts.gov
3. legalzoom.com
