The treatment of taxes in bankruptcy is complicated, and falls into a number of areas.
Tax Returns In Bankruptcy
All bankruptcy debtors are required by the Bankruptcy Code to provide the bankruptcy trustee with a copy of their last federal income tax return prior to the first meeting of creditors. Many trustees require the last 2 tax returns. Chapter 13 debtors (wage earner plans) must have filed their last 4 tax returns prior to the creditors meeting. In the Southern District Of Florida the bankrupt must provide the trustee with copies of yearly income tax returns during the pendency of the bankruptcy case.
Cancellation Of Tax Debts In Bankruptcy
Firstly, some types of tax debt can not be cancelled in Bankruptcy. A tax that is required to be collected or withheld (payroll taxes) can not be discharged in bankruptcy. A tax debt in connection with the filing of a fraudulent return can not be cancelled in bankruptcy.
In some cases income tax debt can be eliminated in Chapter 7 and Chapter 13. The requirements are: a non-fraudulent return must have been filed; the tax return was due at least 3 years prior to the filing of the bankruptcy; the return was actually filed more than 2 years prior to filing bankruptcy; and in the event of an audit, the tax was assessed by the IRS at least 240 days before the bankruptcy filing. If these requirements are met the tax can be cancelled in Chapter 7, and treated in the unsecured class in a Chapter 13 Case. Otherwise the tax is not eliminated in Chapter 7, and must be paid in full as a priority claim under the Chapter 13 Plan.
Tax Liens In Bankruptcy
If the IRS has filed Notices Of Federal Tax Lien other complications arise. For instance, even if the debt is eliminated in Chapter 7, the tax lien is not cancelled. Although the IRS can not levy on your wages, the lien continues to encumber your real estate. Consequently, you will not be able to sell the real estate until you pay the tax, or the IRS releases the lien.
If you have unpaid taxes call Todd to see if bankruptcy can help!