Discharging Income and Non-Income Tax Debt

An extremely common question for filers of bankruptcy is whether or not tax debts are dischargeable. A large variety of them is, including varieties of income tax debts such as on late-filed returns. However, non-income tax debts can be a very real concern for some debtors. It is absolutely imperative to know what you will have to deal with head-on and what you will likely be able to write off.

Income Tax Debts

Income tax, as has been stated, is usually dischargeable. If your debt meets the following characteristics, as laid out in 11 USC §523(a)(1), you will almost certainly be able to write it off:

  • More than three years have passed since the tax return that generated the liability was due (not filed; certain proceedings can extend the filing date);
  • The tax return in question must have been filed at least two years before your bankruptcy filing;
  • More than 240 days have passed since any Internal Revenue Service (IRS) assessment; and
  • No fraud or attempted fraud has been committed in regards to this debt. Mistake can be proven, but any willful fraud immediately renders the debt in question non-dischargeable.

Even if an income tax debt is ruled non-dischargeable, you may not be required to pay all of it. If you file for Chapter 13 bankruptcy, your debts will be organized into priority and non-priority. Priority debts are unsecured (that is, not attached to collateral) and must be paid in full. This, of course, may leave less money available for nonpriority debts, and some creditors may be more willing to negotiate if it means they may get some repayment rather than none.

Non-Income Tax Debts

Generally speaking, most non-income tax debts (that is, taxes which are not income related) are not dischargeable. The most common tax liabilities that people try and fail to discharge are:

  • Certain business-related taxes, such as customs duties and employment taxes;
  • Non-punitive tax penalties;
  • Taxes collected or withheld by a third party – for example, FICA, Medicare, and Social Security taxes withheld by an employer for an employee;
  • Tax liens; and
  • Recent property taxes.

Be advised that property taxes assessed up to one year before your filing are not dischargeable. However, you can discharge your personal liability for property taxes that were payable more than a year before you filed, as long as there is no penalty outstanding on them. Outstanding property taxes, however, can create a tax lien.

Tax liens are a somewhat unusual category. The obligation to pay the tax is wiped out in a Chapter 7 bankruptcy, but liens are secured debts – that is, they have collateral attached. Secured debts are not removed by bankruptcy discharge as a rule, meaning that the lien will stay on your property. Very often, this results in the debtor selling the property to pay off the lien, given that they have little to no other assets with which to do so.

Contact A Tax Attorney Today

If you are in trouble because of tax debts, it is usually best to call in a professional. The tax attorneys at the Law Offices of Stephen B. Kass, P.C. have years of experience in this field, and we are happy to help those who need it. Contact our New York City office today for a free initial consultation, and we will discuss the options available to you.

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