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IRS TAX DEBT & BANKRUPTCY

There is a common misconception that income taxes are never dischargeable in bankruptcy. The truth is you can discharge federal, state, and local income taxes in Chapter 7, Chapter 13, and Chapter 11. Penalties and interest are also dischargeable. Determining which back taxes are dischargeable can be complex. However, it is possible to discharge significant income tax debt in bankruptcy if your tax debt fits within the following rules:

The 3 Year, 2 Year, and 240 Day Rules

The Bankruptcy code sets out specific time periods that determine if you can discharge your taxes, often called the 3-year, 2-year, and 240-day rules. Under these rules, you can discharge taxes that came due 3 years before filing for bankruptcy, as long as it has been at least 2 years since you filed the tax forms and 240 days since the taxes were assessed. These rules are complex and often misunderstood. You should meet with one of our attorneys to go over your tax records.

1. The 3-Year Rule. This rule states that to discharge your back income taxes, they must become due at least three years before you file for bankruptcy. Bankruptcy Code §507(a)(8)(A)(i). Typically, your federal and most state income taxes become due on or around April 15th of each year. In most cases, it is simply a matter of adding three years to this due date to determine the earliest date you can file for bankruptcy and still discharge your taxes.

Example: Joe’s 2022 federal income taxes are due on April 15, 2023. If Joe owes taxes for that year and wants to discharge them, the earliest he can file for bankruptcy is April 15, 2026 (April 15, 2023, plus 3 years).

Regardless of the initial due date, if you file for and receive an extension of time in which to file your taxes, the due date falls on the day the extension expires.

2. The 2-Year Rule. Under the 2-year rule, your income tax returns must have been filed at least two years before filing your bankruptcy petition. This requirement allows you to discharge your taxes, even if you filed your tax forms late, as long as you file them at least two years before filing for bankruptcy, §523(a)(1)(b)(ii).

Example: Jill’s income taxes were due on April 15, 2022. Jill did not get an extension. However, she did not get around to filing her tax forms until June 1, 2023. If Jill wants to discharge her 2022 taxes, she cannot file for bankruptcy until two years from the date she filed her taxes AND more than three years from the date the taxes were due.

What if you did not file? If you did not file an income tax return in a given tax year, any taxes assessed by the IRS for that year are not dischargeable. §523(a)(1)(b)(i). We sometimes see clients whose taxes would have been dischargeable, if only they had filed their tax forms. If your tax debt is significant, we may advise you to file your tax forms and wait to file bankruptcy.

Quick Point: If the IRS files a return on your behalf, it is not considered a filed return for the purposes of this rule. You must still file a tax form for that year.

3. The 240-Day Rule. Taxes must be assessed at least 240 days before you file for bankruptcy under this rule or not assessed at all. As a practical matter, the date of assessment is typically on or near the date you filed your income tax form (assuming the IRS and you agree on the amount of taxes owed). However, if you file a correction, or a change results from an IRS audit, the assessment date may be substantially later. §507 (a)(8)(A)(ii).

If you are in a dispute with the IRS regarding how much you owe and plan to file for bankruptcy, you should inform your bankruptcy lawyer of the dispute. A tax dispute can impact the assessment date.

Quick Note: If  back taxes are an issue, it may be necessary to order an IRS “account transcript” (sometimes called a “literal transcript”) for the tax years in question. The account transcript typically includes the assessment date. Note that this is not the same as a “tax return transcript”. You can order an account transcript from the IRS over the phone or online, or by using IRS Form 4506T.

Other actions can add additional time to some or all of the 3-2-240 time requirements, including (a) making an offer in compromise, (b) having filed for bankruptcy previously, or (3) obtaining a taxpayer assistance order. §507(a)(8)(A)(i). However, simply entering into a payment arrangement with the IRS does not toll the statute of limitations.

Other Issues

Tax Evasion and Fraud. If a taxpayer willfully evades taxes or commits tax fraud, the taxes involved are not dischargeable. §523(a)(1)(C). However, the Bankruptcy Code means deliberate tax evasion, not an honest mistake.

Penalties and Interest. Penalties and interest assessed by a taxing authority are dischargeable, along with the taxes. In other words, if the taxes are dischargeable, the penalties and interest attached to them are dischargeable as well.

Tax Liens. Discharging income taxes in bankruptcy does not remove a tax lien. You can certainly file for bankruptcy with a tax lien, and the underlying debt will be discharged, if you meet the requirements of the 3-2-240 rules. However, the lien against property you acquired before bankruptcy still stands. Discuss the implications of this with one of our attorneys.

MORE INFORMATION

The tax rules are complicated and the above discussion is not legal advice. We will need to spend some time with you and your tax records before we give you legal advice.

At Keegan & Company Attorneys we offer a free consultation with a knowledgeable attorney to discuss your individual situation. Call 513-752-3900 to schedule your free consultation at our office.

BANKRUPTCY COURT “MEETING OF CREDITORS”- NO NEED TO WORRY, WE HAVE YOU COVERED!

DO I HAVE TO GO TO COURT FOR BANKRUPTCY?

One of the most commonly asked questions we receive in our office is “will I have to go to court and appear before a judge”?  There will be a telephone conference at your attorney’s office before a trustee at a meeting called the “meeting of creditors”.  The primary purpose of this phone call is to give the bankruptcy trustee an opportunity to review you petition and have you confirm under oath the information provided in your schedules.

Knowing what to expect at the hearing can make the process go smoother and help to ease any anxiety.

WHO WILL ATTEND THE MEETING OF CREDITORS?

Usually, the only people on the phone call meeting are the trustee, your attorney and you.  Many people are worried that their creditors will come to this hearing and harass them.  Although your creditors will get notice of your meeting of creditors they rarely attend.  If they happen to appear your attorney will be with you to make sure they do not do anything inappropriate.

THE SETTING

Since  COVID, the meeting place has changed to our EASTGATE office in the form of a phone conference. You will answer questions from the trustee over the phone while in your attorney’s office.  As of 2022, these meetings are still taking place by phone conference and it appears this will continue.

AFTER THE 341 MEETING

If your case is a Chapter 7,  after your meeting you will need to complete a second credit counseling session.  Once that is complete and submitted to the court you will just be waiting for your discharge which will be issued approximately 120 days after your case is filed.  If you are in a Chapter 13 you will need to make your payments as ordered by the trustee. At the end of your payment agreement you will complete a second credit counseling session to complete your case and get your discharge. We will help you know what you must do to complete your case and get your discharge. Your discharge is your first step toward better credit.

FREE CONSULTATION

Call Keegan & Co. Attorneys, LLC at  513-752-3900 to schedule your free consultation at one of our convenient offices: Eastgate or Middletown. You will have plenty of time to discuss your unique circumstances with an experienced and knowledgeable attorney. We offer flexible meeting times and flat fees. Both our attorneys and staff work to make the bankruptcy process as seamless and easy for you as possible.

Is Personal Bankruptcy Filing Made Public?

Are you considering filing for bankruptcy protection, but concerned neighbors may read about it in the paper or on the internet? Bankruptcy filings are public record but the fact that you filed is not something that is easily obtained by the general public.  There is a public access system known as PACER which contains information regarding all federal court filings in the United States.  To gain access to that system you must register and pay per page for each document you obtain. Pacer is more or less used for bankruptcy professionals, lenders, and others who have direct need to look up prior bankruptcy cases in detail.

The fact that you filed bankruptcy will appear on a credit report for up to 10 years.  Therefore, if you apply for a job, rent an apartment, or apply for credit, those obtaining your credit report with your consent will become aware of your bankruptcy filing. Additionally, in certain applications there may be questions concerning whether or not you have ever filed a bankruptcy before.

For the most part, the fact that you filed for personal bankruptcy will be known by just you and the others you inform.  When you file for either Chapter 7 or Chapter 13 bankruptcy, you are required to list all of the people to whom you owe money.  If you owe a family member or a friend or anyone else, that person’s name and address must be listed on your petition.

BENEFITS

What kind of relief are you obtaining?  Are you saving your home from foreclosure?  Are you stopping a wage garnishment that’s taking 25% of your pay?  Are you getting a drivers license that is currently suspended due to reinstatement fees?  Are you unable to make ends meet because of your debt commitments?  The psychological relief our clients receive from riding themselves of debt is usually great.

MORE INFORMATION

Since 1992, Keegan & Company Attorneys has helped thousands of people protect their assets and gain freedom from overwhelming debt. Call 513-752-3900 to schedule a free consultation with an experienced attorney. We have 2 convenient locations: Eastgate, Ohio and Middletown, Ohio. We offer fair fees, expert advise, and flexible appointment times.

Bankruptcy and Vehicles

A major concern when thinking of  bankruptcy is the potential loss of your vehicle.  The best solution depends on many factors such as the value of your car and the status of your loan.

You own your car free and clear

There are certain exemptions that can allow you to keep your car.

You are current on your vehicle

If your intention is to keep your vehicle, continue making your payments during the bankruptcy. You will need to sign a reaffirmation agreement where you re-sign on your vehicle loan. This reaffirmation agreement makes the debt you owe on your vehicle non-discharged in bankruptcy.

You are upside down on your vehicle

Here you owe more on your vehicle than it is worth. You could be in this situation for several reasons, usually because you traded in a previous vehicle that had a loan balance. This also happens as vehicles depreciate. One benefit of bankruptcy is access to a special program that allows you to re-finance your vehicle for what it is currently worth. This “redemption” program is not with the bankruptcy court and may not be suitable for everyone.

You are behind on your vehicle payments

If you are behind on your payments and want to file Chapter 7 and keep your vehicle you will need to get current. Creditors will allow a reaffirmation agreement if you are current. If you are behind on your vehicle and want to keep it but do not have the funds to get current on your payments, then Chapter 13 may help you. Under Chapter 13 bankruptcy you can catch up and pay off your vehicle over 3-5 years.

Repossession

If the vehicle is repossessed and sold at auction you may have a “deficiency balance”. This is the amount owed after the amount received for your car at auction. This unsecured debt can be discharged through bankruptcy.

WE CAN HELP

Every situation is unique. Call us at Keegan & Company Attorneys, 513-752-3900, and schedule a free consultation at one of our convenient offices. Our free consultation with an experienced attorney will allow plenty of time to discuss your individual circumstance.