Considering Bankruptcy And Havent Filed Taxes
Properly filing your taxes is an important part of making sure that your bankruptcy case goes smoothly. Failure to file taxes can end in the dismissal of your bankruptcy case, not to mention a waste of your time, money and energy.
Heres what you need to know:
What Is Chapter 7 Bankruptcy
Chapter 7 bankruptcy is spelled out in Chapter 7 of the United States federal Bankruptcy Code and is also sometimes referred to as straight or liquidation bankruptcy. In this form of bankruptcy, you might be eligible to cancel some or all of your debts or sell your property or assets to repay creditors. However, the bankruptcy court essentially assumes control of your property as well as your debts when you file Chapter 7. In rare exceptions, individuals who file Chapter 7 might still be able to manage their own property and income after they file for bankruptcy.
If you are considering filing Chapter 7 bankruptcy to resolve any tax debts exceeding $10,000, please continue reading and contact our offices today by calling 793-1231.
What Bankruptcy Can And Cannot Accomplish:
- The taxes in question must be federal income taxes.You will still be responsible for paying property taxes, tax liens, fines,and penalties.
- You must have filed a return for the debt you are trying to clear morethan two years before filing and the tax year of the liability needs tobe at least three years ago.
- The tax liability must also have been assessed by the IRS at least 240days before the filing.
- If the debt is not eligible for discharge, the borrower may be able tooffer in compromise or enter into an installment agreement to settle the debt.
- Bankruptcy will not help if you attempted to evade paying taxes or fileda fraudulent return.
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Were All Tax Returns Accurate When Filed
Debtors cannot obtain relief from tax debt when inaccurate or fraudulent tax returns are filed. A return cannot be incorrect in any fashion when submitted to a bankruptcy court. This includes willfully attempting to obtain invalid deductions, as well as other false or fraudulent claims. If a return is ruled inaccurate or fraudulent, the debtor will be expected to pay the full outstanding amount, including interest and penalties, regardless of other discharges granted through the bankruptcy.
The Automatic Stay And The Irs
The moment you file a consumer bankruptcy, a mechanism called the “automatic stay,” or auto-stay, stalls most legal proceedings and prohibits your creditors from continuing collection efforts. This means creditors can’t sue, garnish, bill, or call you, or otherwise attempt to collect a debt you owe. The auto-stay applies to the IRS as well. While the automatic stay is in place, the IRS cannot send you collection notices, garnish your wages or bank accounts, or even offset your tax refund.
The automatic stay expires when your bankruptcy discharge is entered or your case is closed or dismissed, whichever happens first. If you owe tax debt to the IRS, it might hold your refund until the automatic stay expires, so that it can collect by taking back some of your refund. Also, while the IRS is not allowed to collect for itself while the automatic stay is in effect, it may offset your refund to pay back persons to whom you owe child support — because child support collections are not stopped by the automatic stay.
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Does Bankruptcy Clear Tax Debt In Canada
When you file for bankruptcy, you enjoy CRA debt relief along with relief from all other unsecured creditors. The common belief that you cant escape tax debt this way comes from the past. Before 1992, the Canada Revenue Agency was considered a preferred creditor in the Bankruptcy and Insolvency Act, and it could use this status to oppose a debtors discharge from income tax debt.
Since 1992, it has been listed as an ordinary unsecured creditor on the same level as any bank, credit card company, or other lenders. CRA debt can now be discharged unopposed.
There are some exceptions to this rule, including those who owe over $200,000 in taxes, and that number represents more than 75% of their proven debts. Otherwise, as a general rule, if you owe Revenue Canada money, insolvency can help.
Closing Of Your Bankruptcy
When you receive a discharge from the court or your bankruptcy case is closed:
- Youll receive post-bankruptcy letter with your remaining tax debt. Pay in full or contact us to set up a payment plan.
- Well start collection action
- You are still required to continue to file and pay your taxes
When youre closing your bankruptcy:
The court appointed third party must:
- File a final tax return
- Pay the minimum tax for the following tax year, if applicable
- Close the bankruptcy within that same year
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Can You File Chapter 7 Against The Irs
One of the most common questions we get is can you file chapter 7 against the IRS, and the answer is often yes. To be able to discharge federal income tax debt, you must qualify based on the conditions mentioned above.
While you can file Chapter 7 for income tax debt, the same strategy will not work for payroll taxes. Additionally, rules on previously unfiled tax returns are not uniform and newer liabilities are unable to be resolved. A Chapter 7 bankruptcy cannot discharge tax liens recorded before filing.
Under this chapter, the debtor will receive an absolute right to discharge all of the debts that are included as part of the bankruptcy. However, taxpayers will not receive an absolute discharge for their tax debts. The following tax debts will not be discharged in a Chapter 7 bankruptcy:
- Tax debts for which no original returns were filed by the taxpayer
- Tax debts for which a return was filed within 2 years of the bankruptcy petition
- Tax debts based on returns that were fraudulently filed
- Tax balances that arose because a taxpayer was found to have willfully attempted to evade their tax responsibility
Other tax debts, including assessed penalties are dischargeable unless the event that gives rise to the penalty occurred within 3 years of the bankruptcy or relates to an underlying tax balance that is not dischargeable.
Chapter 7 is not the only way to handle bankruptcy and taxes with the IRS, so you should consider other chapters before filing.
Tax Debt Discharge In Chapter : A Timeline
All these rules apply to the bankruptcy process as well. If you have past-due tax debt, things will be a little different.
Filing: On your paperwork, you will list the tax debt as priority unsecured debt in Part 1 of Schedule E/F.
Trustee meeting: At this meeting, the trustee will review your paperwork, confirm your identity, and ask questions about any red flags in the paperwork.
In special circumstances, you’ll have to meet additional qualifications to discharge some types of debt. This may be true in cases involving tax liens. It’s also true in student loan cases. If you want to discharge student loan debt, you must convince the court that there is an undue hardship preventing you from repaying the loan.
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Tax Debt: Bankruptcy And The Automatic Stay
Most IRS collections start with a notice of past-due taxes. Then, every few months, the IRS sends another letter. Each is slightly more threatening than the last. Eventually, these letters become legal notices. They also sometimes involve filing a lien, seizing a bank account, or garnishing wages. The automatic stay acts as a pause button. It prevents creditors from contacting you to collect their debts. As soon as you file your voluntary petition, the automatic stay usually takes effect. When that happens, IRS agents can’t even send you a letter about your back taxes. They are forbidden from trying to collect the debt.
The automatic stay extends to property as well. Although most of your personal property is exempt â or protected â during Chapter 7, the IRS and other debt collectors can’t touch any of the more valuable assets you happen to own.
An automatic stay is a powerful tool for protecting individuals. No matter what stage IRS collection efforts are in, the automatic stay stops them cold. With few exceptions, the stay applies to all forms of communication between debtors and creditors. Creditors who violate the stay can face serious consequences. And, although the stay prevents creditors from contacting you, it does not prevent you from beginning conversations with them. This puts you in control of negotiations with your creditors during bankruptcy.
Eligibility Requirements To File Chapter 7 Bankruptcy
There are certain eligibility restrictions and requirements individuals must meet in order to file for Chapter 7 bankruptcy. For instance, if you have received a bankruptcy discharge within the last 6-8 years, you are likely ineligible to file Chapter 7. You also wont be eligible to file Chapter 7 if you have had a Chapter 7 or 13 case dismissed within the previous 180 days due to violating a court order, or if a court has determined that you fraudulently filed for bankruptcy in the past.
Additionally, if your monthly income exceeds the median income for a household of your size within your state, you are not eligible unless you complete the Means Test, which measures your disposable income and determines the amount of your debt that the government believes you could reasonably repay over a five-year repayment period.
Lastly, your bankruptcy claim could be dismissed if the court believes that you have attempted to deceive or cheat your creditors, or that you have concealed your assets to protect your property. Actions and behaviors that will raise the suspicion of the court may include:
- Transferring assets to friends and family
- Maximizing debts when it was clear that you were incapable of repayment
- Hiding assets or money during a divorce
- Lying or failing to disclose accurate information concerning debts and income on a credit application
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Best Types Of Bankruptcy For Tax Debt
Tax debt can be discharged by filing for protection using any of the options available under the federal bankruptcy code. These include Chapters 7 and 13 for most individuals, Chapter 12 for family farms and fishing operations, and Chapter 11, which is mostly for businesses and larger debts.
Chapter 13 is the most common type of individual bankruptcy filing when tax debt is involved, the IRS says. Chapter 13, known as a reorganization bankruptcy, involves making arrangements with creditors to pay off debts over a period of three to five years. By comparison, a Chapter 7 bankruptcy wipes out many debts, meaning they never have to be repaid.
In a successful Chapter 13 filing, the tax debts that are paid off under the reorganization plan and any tax debts over three years old at the time of filing will be discharged. During the payoff period, the taxpayer must file timely returns and pay all new income taxes that come due.
Depending on circumstances, interest and penalties may be discharged with a Chapter 13 filing. Interest on a dischargeable tax also will be erased. Penalties are dischargeable if they are more than three years old.
Tax Debt And Chapter 7 Options
In a Chapter 7 case, all property owned by a Debtor becomes the property of the bankruptcy estate upon initiation of the case. The Debtor is permitted to keep all exempt property, and all other property is turned over to the Bankruptcy Trustee for sale and distribution of the sale proceeds to Creditors. Debtors with the non-exempt property they desire to retain should file Chapter 13 bankruptcy to preserve their assets as Debtors are permitted to keep all property in a Chapter 13. In Chapter 7, almost all of a Debtors debts are completely eliminated, and the Debtor emerges from Chapter 7 debt free. Certain debts, however, are not dischargeable in bankruptcy, including tax liabilities. Certain tax liabilities, however, may be discharged in bankruptcy.
The above time periods are extended based on certain specific actions such as a prior bankruptcy filing, pending Offer in Compromise, and other limited actions.
TIP: Timing can be important in attempting to discharge old tax liabilities. Consult with a bankruptcy attorney to evaluate the proper time for you to file bankruptcy to enable you to take advantage of the Chapter 7 discharge.
For more information on Tax Debt & Bankruptcy In Utah, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling 501-0100 today.
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Interest Stops Accruing On Unsecured Tax Obligations
If the IRS has not filed a Notice of Federal Tax Lien NFTL against a Debtors assets prior to the date the Debtor initiates a Chapter 13 case, interest stops accruing on the unpaid tax liability. If the IRS HAS filed a NFTL, the tax obligation is secured by the lien, and interest must be paid on the tax debt to the extent of the value of the underlying collateral. For example, if you owe the IRS $8,000, and own property worth $5,000, interest would continue to accrue only on $5,000 of the tax debt. The remaining $3,000 portion of the tax debt would be unsecured.
Can You File Bankruptcy On Taxes
Yes, you can file bankruptcy to resolve back taxes, but not for all of your tax debts. Every chapter has a different set of requirements and processes. Chapter 7 is often a saving grace for anyone in over their head with insolvency because it completely eliminates all dischargeable back tax debts. This strategy is used for those who are unable to pay back income tax debt however, it is more difficult to get approved for than the other chapters of bankruptcy.
While you can file Chapter 7 for income tax debt, the same strategy will not work for payroll taxes. In addition, rules on previously unfiled tax returns are not uniform and newer liabilities are unable to be resolved. Chapter 7 is not the only way to handle bankruptcy and taxes with IRS, and you should consider other chapters before filing. Learning more about the different chapters of bankruptcy will help you determine which type can help you in your circumstances.
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Notify Us About Your Bankruptcy To Stop Collections
Let us know once you have successfully filed for bankruptcy. Once we know you filed for bankruptcy, we will stop collections on your tax debt .
We will not stop collections just because you hired an attorney. You need to file for bankruptcy through the courts.
Provide us with your bankruptcy case number or a copy of your petition.
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Owing money to the CRA can be very stressful. There are many ways you can wind up in tax debt, such as not filing your personal income tax returns, failing to pay taxes on business income, HST payments for the self-employed, or inadequate payroll deductions from your employer if you work multiple jobs.
When you owe the CRA money, they will charge penalties and interest on unpaid amounts. This also includes a late filing penalty of 5% plus 1% of your balance owing each month. If youre afraid that you are going to owe the government money, dont delay filing your taxes. As you could incur harsher penalties, and end up paying more in the end.
Given the collection powers of the CRA, that include: garnishing your wages, seizing your bank accounts, or even registering a lien on your home the quicker you act on CRA debt, the better. Fortunately, filing for bankruptcy in Canada allows you to include tax debt, thereby stopping CRA collection actions.
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