Taxes and Bankruptcy

What are the two things you can be certain of in life? Yes, death and taxes.

Government agencies don't mess around when it comes to collecting taxes.  Collection efforts can include tax liens on real estate, levies of bank accounts, tax refunds and garnishments against pay, and even garnishment of social security income. Interest and penalties accrue on unpaid tax debt, and that debt can grow out of control in a short period of time.

Getting rid of taxes through a bankruptcy is a very complicated process and involves important considerations before a bankruptcy is filed.  An experienced bankruptcy attorney is your best resource to analyze your tax debt and calculate the proper timing of a bankruptcy to maximize how much debt will be discharged. Strategically waiting a few days or months can make the difference between a debt being dischargeable and surviving the bankruptcy.  Skilled attorneys analyze numerous issues by tax year such as a) whether the tax returns were filed timely and their assessment date, b) whether you filed them or the IRS filed them for you (a substitute for return) c) how long the returns have been filed, d) the nature of the tax debt and much more. 

Fundamentals of discharge of taxes in bankruptcy (wait, calculate from when?)

Here are some fundamental rules about discharge calculations for taxes and bankruptcy -

  1. Taxes can't be discharged in bankruptcy until at least three years after they were due. This can be tricky – if a return was filed with an extension, the discharge date will be extended as a result of that extension.
  2. Your tax return must be filed at least two years prior to your bankruptcy for it to be eligible for discharge. For example, if an unfiled old tax year is recently filed, if there hasn't been two years of collection available to the agencies, it won't be dischargeable.
  3. Taxes must have been assessed within 240 days before your bankruptcy filing.

Some important things to always remember about taxes and bankruptcy

File your tax returns on time, even if you can't afford to pay the tax due. The general rule is that until a return is received, no tax liability can be assessed.  It is not a crime to file your taxes and not pay the debt which is due.

Unfiled taxes receive no benefit in bankruptcy, as there is no tax filing date or assessed liability date from which to count down the time periods to discharge.

Willful attempts to evade payment of taxes and penalties for tax fraud are never dischargeable in bankruptcy.

Trust fund taxes (payroll tax withholdings whereby an employer withheld the taxes from the employees pay but never paid them to the taxing authority) are never dischargeable in bankruptcy.

Oregon Department of Revenue has no statute of limitations on collections. IRS has a 10 year collection period on debt. If the IRS sues on the tax debt and obtains a judgment, they can renew that collection period for another 10 years!

Don't ignore the notices from the government to contact them to make payment arrangements. A distraint warrant may be issued against you for unpaid taxes. This is not an arrest warrant. It is like a garnishment, used to collect monies from your wages, bank accounts and tax refunds.  These warrants are issued as a result of failing to set up installment agreements for payment on unpaid taxes.

The government may send you notice of a lien or a levy. There are notable differences between the two.  A lien secures the government's interest in your property when you don't pay your tax debt. A levy is the way the government takes your property to pay your overdue taxes.  Failing to call and make payment arrangements to settle your tax debt will result in your receipt of one of these notices.

What if the taxing agency is asking me to pay a payment I can't afford?

If you have contacted a government agency and you cannot afford the payment plan they are suggesting, a Chapter 13 may be a better option to pay your debt over time. If this is your situation, give us a call at 503-227-3004 to hear how we can help.