Hi, Matt McArthur, bankruptcy attorney at Clear Counsel Law Group. Today, we’re going to be talking about back taxes and your ability to get rid of those taxes through the filing of a bankruptcy case.
Now, just generally speaking, it is possible in some circumstances to get rid of taxes by filing a bankruptcy case. Generally speaking, to make the taxes dischargeable, taxes need to be older than three years.
You have to have filed a tax return for that tax year more than two years before filing your bankruptcy case, and there cannot have been any reassessments in the last 240 days.
In other words, the IRS can't obtain any new information where they go in and recalculate the tax liability.
A Back Taxes Horror Story
There's a specific story that I really want to tell right now about a guy that I met with recently, and he was pretty wealthy but boy, was he in a mess in terms of the amount of taxes that he owed. He made a very healthy living and he came in after having done a consultation with a tax attorney, but his meeting with the tax attorney didn't quite sit right with him.
It felt like he needed more information, so he decided to come and meet with a bankruptcy attorney, and I was glad to sit down with him, had a free consultation and help him out in terms of providing him advice for his specific situation.
Now, he had indeed received some bad advice from his tax attorney. His tax attorney, because the tax debt was not quite three years old, and as we just discussed, that's a requirement to be able to discharge it in a bankruptcy, because this tax debt wasn't quite three years old, the tax attorney proposed filing an offer and compromise, think of it like a settlement offer with the IRS, to essentially keep the IRS off his back until three years had passed, and he could theoretically file for bankruptcy and then discharge the debt at that time.
Unfortunately, what the tax attorney didn't quite understand about bankruptcy law is the three-year requirement when discharging taxes, there's a specific part of this law that says that if you file a bankruptcy or you file an offer and compromise, it's essentially like pushing the Pause button on the running of the clock.
Why You Specifically Need a Bankruptcy Lawyer
By the filing of this offer and compromise with the IRS, by negotiating with the IRS in this manner, it pushed Pause on the clock and the three years isn't going to come to fruition unless he's outside of this offer and compromise scenario.
The strategy to get to that three-year period, to be able to satisfy this requirement, isn't going to work by submitting an offer and compromise to the IRS.
The second big mistake that wasn't considered by the tax attorney in this situation was this individual made a very healthy living, and based upon his income levels, he almost certainly would not have qualified for Chapter 7 bankruptcy due to the means test, which means he'd be looking at filing a Chapter 13 bankruptcy.
In the Chapter 13 bankruptcy scenario, his plan payments would be based in part upon his income levels, and his income was at such a level to where he would probably have to pay back all types of creditors.
Even if assuming that we could get to that three-year requirement and then file for bankruptcy, he'd have to file a Chapter 13 bankruptcy, but the three-year requirement would make the taxes change in the type of debt that they're classified as.
Where they were once a priority debt that would have to be paid back within the Chapter 13 plan, they would now be considered a general unsecured creditor similar to a credit card or medical debt, but even the unsecured creditors in this individual's Chapter 13 plan would likely receive payment in full during the course of the bankruptcy.
Waiting the three years does him no good. Filing for bankruptcy, he's going to pay them back in full one way or the other, and so really he received two pieces of bad advice by meeting with an individual, even an attorney who was well versed in tax law but didn't quite fully grasp how the taxes and the tax liability would apply in a bankruptcy situation.
Each of These Cases Are Very Fact-Specific; Please Come in for the Free Consultation
It's a very fact-specific analysis that needs to be gone through, and what I would strongly recommend is if you have any back tax issues, please come and speak with a debt expert, somebody who is experienced in dealing with these types of issues inside the bankruptcy process.
You have no reason not to come in and get a free consultation and get the information to be fully informed, and to make the best decision possible for you.
Again, my name's Matt McArthur, Clear Counsel Law Group. I look forward to hearing from you soon if you're facing any of these types of issues.