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:
Tolling the 3-2-240 Rules
Tolling means to suspend. The 3-2-240 rules can be tolled because of:
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:
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.
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seek bankruptcy protection under federal law