Dreaded Tax Liabilities

Question: I am self-employed, and have been struggling for some time to become profitable.  Unfortunately, I have been borrowing more heavily from the taxing authorities than any other creditor, and now find myself deeply in tax trouble.  Some of my taxes go back several years.  We filed each and every year, but are not sure where the taxing authorities are in their assessment of our taxes.  We heard that taxes can never be gotten rid of, even in bankruptcy.  Are taxes dischargeable in bankruptcy?

Answer: Certain tax obligations are dischargeable or may be reorganized in bankruptcy.  The most important factors are the age of the taxes (determined by calculating from the date the returns were first due), the date of assessment of the taxes (determined by the taxing agency), the dates your returns were filed (if they were filed), and whether you attempted to evade payment of the tax by fraud, rather than merely being unable to pay them.  The difference may be that you knew of income and did not report it, in comparison to reporting income and not paying the tax.

In a Chapter 7 case, the minimum requirements for discharging federal or state income taxes are each of the following:  (1) it has been over 3 years since the returns were last due (including extensions, including extensions due to intervening bankruptcy cases or your agreement allowing the taxing authorities additional time);  (2) the returns were timely filed or it has been at least 2 years since the returns were filed;  (3) there was no fraud involved or attempts to evade the tax; and (4) the taxes were not assessed within the last 240 days.

If it has been over 3 years since your returns were last due and they have not been assessed in the last 240 days.  If you have not yet filed the returns or there was some kind of fraud involved in filing them, then they may be dischargeable in a Chapter 13, with payments made based upon disposable income over a period of three to five years, after which you would receive your Chapter 13 discharge.

Whether the taxing authorities have either given notice of a lien or recorded a lien against your real or personal property will impact the dischargeability of taxes, interest and penalties.  And, depending upon the chapter under which you file, the value of the property may impact the extent to which the taxes are secured, unsecured priority, or general unsecured.  Tax Liens that have already been recorded against your property may also be removed under certain circumstances. Your attorney may be able to assist you in accomplishing that nifty feat!  Generally, liens that have attached to specific property will survive a bankruptcy.  What does that mean?  It means that the lien will stay against your property regardless of your discharge of the underlying debt. So, when you ultimately sell that property, if there is extra money available, the lien will be paid first from those proceeds unless you have the lien removed.

Tax Dischargeability analysis is extremely tricky and the only way to correctly determine if taxes are dischargeable in your case is to obtain an official “literal” tax transcript (record of account) from the taxing agency and have it analyzed by a bankruptcy attorney or tax professional with specialized knowledge in this area.  This transcript can be obtained from the Internal Revenue Service by calling 1-866-860-4259.  The Franchise Tax Board (State of California) is a little more difficult.  Fortunately, their transcript usually tracks the Federal, unless your returns were filed at different times.