With smart timing you can discharge—legally and permanently write off—more income tax debts, even with a standard Chapter 7 case.
The right timing of the filing of a bankruptcy case can make a tremendous difference. Our last 8 blog posts have all been about smart timing. If you need to use the bankruptcy laws to get relief from your creditors, it’s only sensible to get as much relief as the laws can give you by timing it right.
The discharge of income tax debts is particularly timing sensitive.
How Chapter 7 and Chapter 13 Conquer Income Tax Debts
Filing bankruptcy with smart timing in 2019 conquers your income tax debts in two main ways:
- Discharge (legally write off) more of your tax debts (likely for the 2015 tax year). This applies to both Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts.”
- Include any taxes owed for the 2018 tax year in your Chapter 13 payment plan. This gives you huge advantages.
Today we’ll show the first part—how to discharge more income taxes in 2019 with a Chapter 7 case. We’ll cover the Chapter 13 aspects in the next two weeks.
Is Chapter 7 “Straight Bankruptcy” Good Enough?
You may be surprised that income tax debts can be discharged under Chapter 7 just like most other debts. They are discharged just as completely as a medical bill or credit card balance. You just need to time it right. You do also need to meet some other conditions. But much of the time those other conditions are met rather easily.
What’s the easiest way to deal with a tax debt? You may have heard that the more complicated Chapter 13 is better if you owe income taxes. That’s often true, especially if you owe for multiple years and/or for more recent tax years.
However, under the following circumstances Chapter 7 is likely better:
- All of the income taxes you owe qualify for discharge
- Some but not all of your income taxes qualify for discharge, but you can handle the rest either through:
The main advantage with Chapter 7 is speed. An income tax that qualifies will be forever discharged. This will usually happen about 4 months after you file your Chapter 7 case. Your whole case will, in most situations, be fully completed at that point. You can get on with your life. In contrast, a Chapter 13 case usually takes at least 3 years and can stretch as long as 5.
Discharge More Income Tax under Chapter 7
There are two main timing conditions for discharging income taxes through Chapter 7. The day that your bankruptcy lawyer files the case must be both:
1) at least 3 years past when the applicable tax return was due, adding any time for extensions to submit the return (Section 507(a)(8)(A)(i) of the U.S. Bankruptcy Code.)
2) at least 2 years past when the tax return was actually submitted to the IRS or state tax agency (Section 523(a)(1) of the Bankruptcy Code.)
Again, there are other conditions. Some involve timing, such as additional time added if you’ve made an offer in compromise on that tax, or filed a prior bankruptcy. (Section 507(a)(8)(A)(ii).) The other main condition is if you “made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.” (Section 523(a)(1)(C).) A recorded tax lien on the tax would add some additional complications. But these additional conditions often don’t apply. If you ARE concerned that any might apply to you, tell your lawyer early in your first meeting.
Applied to Income Tax Owed for 2015
Let’s apply this to a tax debt for the 2015 tax year.
If you owe income taxes for 2015, when would you meet the first of the two main timing conditions? The 2015 tax return was due April 15, 2016. So you need to file your Chapter 7 case 3 years after that, after April 15, 2019. So then the required 3 years will have passed since that tax return was due.
This assumes you didn’t get a tax return filing extension. What happens if you did? That year the standard extension to October 15, 2016 fell on a Saturday. So the extended deadline would have actually been Monday, October 17, 2016. (As you can see, these kinds of minor-seeming details can be crucial.) So if you got this extension you’d have to file your Chapter 7 case after October 17, 2019.
How about the second of the above two conditions? When did you submit your 2015 tax return(s) to the IRS/state? You have to make sure at least 2 years have passed since you’d submitted it/them. If submitted by either the regular due date of April 15, 2016 or the extended date of October 17, 2016, then you’ve already met this 2-year condition (as of the writing of this blog post). If you submitted the return(s) any later, you have to make sure that you meet this 2-year condition.
Assume that you:
- owed $7,000 to the IRS for 2015 income taxes
- submitted that tax return to the IRS on or before April 15, 2016 without an extension
- did not pursue an Offer in Compromise or file an interim bankruptcy case, or if you did the resulting additional time has passed
- the tax return was not fraudulent and you didn’t “willfully attempt” “to evade or defeat” the tax
If you now file a Chapter 7 case after April 15, 2019, this $7,000 tax debt would almost certainly be completely discharged within 4 months of filing. If you file before then this tax debt would not be discharged. See a competent bankruptcy lawyer as soon as possible to determine what’s best for you regardless.