The government wrote the rules of bankruptcy, and therefore you’d think the government would be most protective of its money. It is possible to discharge past taxes, but there are limits and a few hoops to jump through. The tax burdens must be a result of an honest mistake or an honest inability to pay taxes to qualify for discharge in bankruptcy. Willful attempts to evade taxes or commit fraud will prevent taxes from being discharged.
This blog will explain the situations in which taxes are dischargeable. Some advanced planning could get your tax burdens discharged.
Income Taxes
Income taxes older than 3 years can be discharged if you filed returns for those years at least 2 years before filing bankruptcy and were not assessed 240 days before bankruptcy.
Let’s simplify. Let’s say you filed for bankruptcy in 2013. Income taxes that are older than three years -- that is 2009 or earlier -- can be discharged if you filed returns for those years before 2011. So if you owe income taxes for 2009 and filed those returns before 2011 (even if they’re late), and the government assessed no new taxes on 2009 in the last 240 days, then the bankruptcy will discharge the 2009 taxes.
Payroll Taxes
If you have employees and have not withheld their payroll taxes, then you are liable and bankruptcy will not help you no matter how old they are. Fortunately, most individuals don’t have to deal with this because they don’t usually hire employees. Most businesses operate through a corporation, LLC, or partnership. However, the employment taxes paid on your own wages are considered an income tax and are dischargeable in the situation described above.
Property Taxes
Property taxes are dischargeable if they’re older than one year. However, liens created as a result of the property taxes are not dischargeable. Unfortunately, the state or county is quick to record liens against a property when property taxes are overdue. So bankruptcy only helps you with property taxes older than a year if no lien has been recorded.
Duties on Customs
If you are an individual importing goods as part of your business, then you may be paying customs duties. Customs duties are dischargeable if the goods are imported more than one year prior to filing bankruptcy and used within one year of bankruptcy. Or imported more than 4 years from the bankruptcy petition date and not used.
Excise Taxes
An excise tax is 1) an involuntary pecuniary burden 2) imposed by the state legislature under its police or taxing power 3) universally applied to similarly situated entities and 4) does not disadvantage private creditors with like claims.
Basically it’s any tax other than income or property.
In general, excise tax claims are dischargeable if the taxes are older than three years and a return was filed more than 3 years ago. Or, if no return is required, for a transaction older than 3 years.
This is a summary of the dischargeability of taxes in an individual bankruptcy. Please call or e-mail me for a free consultation to discuss your situation, and I can tell you if your taxes qualify for discharge in a bankruptcy. (213) 223-2350 or
marcweitz@weitzlegal.com.
The above is for informational purposes only and does not constitute legal advice. Please seek advice from counsel.
