Are You Able to File for Bankruptcy on Back Taxes in Pennsylvania?



By:Mike Cibik


Filing Pennsylvania Bankruptcy on Back Taxes

No one likes to deal with taxes, especially back taxes. Back taxes are taxes that weren’t paid in the year that they were due. The IRS will hand over the amount of back taxes to a collections agency. If you can’t pay the amount, the IRS often lets taxpayers negotiate a lesser amount through an “offer of compromise” or payment arrangement (installment agreement).


But what if you declared bankruptcy – can you include the back taxes in the bankruptcy petition? This is a tricky question because you can discharge back taxes but there are exceptions. If you have declared Chapter 7, the taxes can be denied depending on their type. If you claimed Chapter 13, you would have to pay them since you have entered into a payment arrangement.


This arrangement will require you to make a minimum monthly payment of 2% of the balance. It is important to note that if you make an offer of compromise, this arrangement can waive the interest and fees and even some of the underlying taxes. However, with an installment agreement, the penalties or accrued interest won’t be waived.


Of the two types of bankruptcy, Chapter 7 is the way to go if you cannot pay the back taxes at all. Chapter 7 will wipe all debts, but to wipe out the federal taxes, they must qualify for discharge. If you can’t discharge the tax debt, you’ll have to file a Chapter 13 and make a payment arrangement.


Discharging Federal Taxes

Federal back taxes can be released if they meet these requirements:

  • The taxes are income taxes only. Payroll taxes, fraud penalties, trust fund taxes or withholding taxes from an employee’s paycheck by the employer are not eligible for discharge. Also, sales tax is not dischargeable in Pennsylvania bankruptcies.


  • You did not commit tax fraud or willful evasion. Willful evasion is more than just not paying the taxes. It also means that when you filled out the tax return, you used:
    • A fake social security number.
    • A different name.
    • A different spelling of your name.


  • It also means that if you repeatedly failed to file your taxes or filed a blank or incomplete tax return.


  • The Three-Year Rule – The taxes are overdue by three years before filing bankruptcy. If you file for an extension, the three-year period starts from the date that the taxes are due under the extension.


  • The Two-Year Rule Your income taxes must be filed at least two years before you file the bankruptcy petition. If you file a tax return late, this counts as not filing it, which can damage your chances of discharging the debt.


  • The 240-Day Rule The income tax debt was assessed by the IRS at least 240 days before you filed your bankruptcy petition or not even assessed.


  • Substitute Forms – They can be filed by the IRS when you haven’t filed a tax return. The discharge depends on whether the IRS filed them with or without your permission.


  • Consensual Substitute Forms – Substitute forms that are filed by the IRS with your permission.


  • Non Consensual Substitute Forms – If the IRS files substitute tax forms on your behalf without your permission, the taxes may not be discharged. You cannot make the taxes dischargeable by filing a form after the IRS filed the substitute forms. Sometimes substitute forms are incorrect – they can overestimate the taxes owed. It is important that you have the substitute forms reviewed by a bankruptcy attorney.


Tolling the 3-2-240 Rules

Tolling means to suspend. The 3-2-240 rules can be tolled because of:

  • An Offer in Compromise


  • A Previous Bankruptcy


  • A Taxpayer Assistance Order – This order is filed by you (the taxpayer), your tax attorney or the National Taxpayer Advocate. It is issued because you are going through a significant hardship caused by the IRS revenue laws.


If you make a payment installment with the IRS, you should stop the payments upon filing for bankruptcy. The IRS cannot make collection attempts while you’re protected by the automatic stay of bankruptcy.


Ordering an Account Transcript

Since there are different dates associated with discharging federal taxes (due date, filing date, and assessment date), you cannot use your last tax form in the bankruptcy petition. You will need to order an account transcript (literal transcript) from the IRS. You’ll need each year for which you owe back taxes. The account transcript will show the required dates for the 3-2-240 rules. Do not confuse an account transcript with a tax return transcript. A tax return transcript will not have the dates you need on it.


Even if you cannot pay the back taxes, you should still file your tax forms. You don’t want to incur the tax penalties for not filing, which are audits, unable to discharge taxes in the bankruptcy or criminal prosecution. If you know you are going to be late in filing them, get an extension. The penalties are much less for filing late than not filing at all. And there’s the issue with federal tax liens.


Dealing with Federal Tax Liens

The IRS can place a federal tax lien against your property even after a Chapter 7 discharge. You must clear the title by paying off the lien before selling the property. You can deal with them after bankruptcy by:

  • Voluntary Release of a Post-Charge Tax Lien – This means the IRS can release the tax lien on the property after the bankruptcy discharge (the taxes were dischargeable) and there is little property.


  • Settlement of the Tax Lien – You can negotiate a settlement of the tax lien if you have substantial nonexempt properties.


  • Payment of a Tax Lien – In Chapter 13, you can pay the tax lien as a secured debt; it will be removed after the bankruptcy discharge.


  • Expiration of Federal Tax Liens – Most tax liens expire after a 10-year period. It is not advised to wait out the 10-year period.


If the IRS refuses to remove the tax lien, you must notify your tax bankruptcy lawyer. He or she may have to file an action for violation of the discharge. Remember, the IRS and other taxing agencies are not exempt from the laws protecting discharged debtors.


Cibik & Cataldo Can Help

The tax laws are complicated enough without adding bankruptcy to the mix. The experienced bankruptcy lawyers at Cibik & Cataldo can help you understand these laws and how they apply to your bankruptcy, especially with back taxes. We can also determine if you can discharge your income taxes and which type of bankruptcy is best suited for you.


Our goal is to keep you informed and to know what to expect in a bankruptcy process. If you are thinking of declaring bankruptcy that would include back taxes, contact us today at (215) 735-1060 to schedule a free consultation.


Bankruptcy Law Awards/Associations

We are a debt relief agency that helps people
seek bankruptcy protection under federal law