By attorney Bruno M. Rizzo
Back Taxes In Bankruptcy
We are often asked if back taxes are dischargeable in bankruptcy. General understanding of tax or bankruptcy law is generally useless to determine the dischargeability of back taxes. The purpose of this article is to introduce a few concepts of the Bankruptcy law as the Bankruptcy laws relate to the discharge of Income-tax liability under the Bankruptcy Code. Few Bankruptcy attorneys have mastered the rules for the classification of taxes as dischargeable or nondischargeable, so don’t be surprised if your bankruptcy attorney tells you that he/she needs to review the relevant tax or bankruptcy law as it relates to a debtor’s specific facts and circumstances.
Some Taxes Are Nondischargeable
It would be accurate to state that some of the taxes that are nondischargeable in chapter 7 are also nondischargeable in chapter 13. Under section 1328(a)(2), taxes that are described in section 507(a)(8)(C) (taxes required to be withheld or collected by the debtor, unfiled return or late return filed within two years before petition), and (fraudulent return or evasion) are nondischargeable when the debtor completes a plan. Other taxes that are nondischargeable in chapter 7, but may be discharged in chapter 13, are priority debts in chapter 13 that are required to be paid in full through the plan unless the creditor agrees otherwise or a claim for them is not filed. Also, some debts that are nondischargeable in chapter 13 are not priority debts.
Arranging Bankruptcy Filing And Filing Of Tax Returns
In some cases, it is to the debtor’s advantage to arrange the bankruptcy filing and the filing of a tax return so that a debt that is nondischargeable in chapter 13 will also be a priority debt. If that is the case, the debtor will be permitted to pay the debt, which will not be discharged, before paying other debts that will be discharged. For example, a debtor may render an old nondischargeable tax debt, for which no return was filed, a priority debt if the debtor files a return shortly before the bankruptcy case and waits for the assessment to be made before filing the case. The tax is then one which was assessed within 240 days before the petition and is a priority debt, which can be separately classified and paid, with penalties and interest, before other unsecured debts. This strategy may not be successful if the taxing authority has already made an assessment.
This article is an attempt to encourage a bankruptcy candidate to seek good counsel regarding the highly technical discharge rules. The good news is that your fact situation may fall within the new bankruptcy rules.