Can I File Bankruptcy If I Haven’t Paid My Taxes?

Feeling overwhelmed by unpaid taxes? It’s a heavy weight, I know. You might be wondering if you can file bankruptcy if it haven’t paid my taxes. Many people face this scary situation. The good news is, sometimes, bankruptcy can offer a way out, even when tax debt is involved. You’re not alone in asking if you can file bankruptcy if it haven’t paid my taxes; it’s a common concern when declaring bankruptcy.

Tax problems can feel like a maze with no exit. The Internal Revenue Service (IRS) or state tax agencies can be very persistent. They have strong collection powers, and dealing with the revenue service directly can be stressful. This often leaves people feeling helpless, especially if they are facing lawsuits, impacts on their bank account, or the loss of their home.

But there are rules and processes that might help. Bankruptcy law can stop collection actions from the internal revenue service. It can also, in some cases, wipe out certain tax debts. It’s not a magic wand, but it’s a powerful tool for those who qualify, providing a structured approach through a bankruptcy case.

Understanding Tax Debt and Bankruptcy Basics

So, you have tax debt. And you’re thinking about bankruptcy. It’s smart to get the facts. Not all tax debts are treated the same in bankruptcy, and the type of tax return involved matters. And not all bankruptcy types handle tax debt identically.

The two most common types of personal bankruptcy are Chapter 7 and Chapter 13. Chapter 7 bankruptcy aims to wipe out many debts quickly. It’s often called a “liquidation” bankruptcy. Chapter 13 bankruptcy involves a payment plan where you commit to repaying creditors, which could include the IRS, over a period. You pay back some or all of your debt over three to five years, often using direct deposit for plan payments.

When it comes to taxes, timing and the type of tax are very important. Some older income tax debts might be dischargeable. This means you wouldn’t have to pay them after bankruptcy. But newer taxes, or things like payroll taxes you withheld from employees, are usually not dischargeable. This area is detailed, so knowing the specifics, such as information found in your tax record, helps a lot.

Can You Really File Bankruptcy if it Haven’t Paid My Taxes?

Yes, you absolutely can file for bankruptcy even if you owe taxes. Filing for bankruptcy isn’t blocked just because tax debt is one of your problems; indeed, the need to file taxes correctly is paramount. In fact, for many people, tax debt is a big reason they consider declaring bankruptcy. The bigger question is what bankruptcy can do for your specific tax situation and the tax returns in question.

The moment you file for bankruptcy, something called the “automatic stay” goes into effect. This is a court order. It generally stops creditors, including the IRS and state tax agencies, from trying to collect debts from you. This means no more wage garnishments, levies on your bank account, or threatening letters, at least temporarily while the bankruptcy case is active. This breathing room can be a huge relief.

But the automatic stay is not a permanent solution for all tax issues. What happens next depends on the type of tax, how old it is, and whether you filed your tax returns accurately. It is important to note that the automatic stay may not stop certain actions, like criminal tax proceedings, although these are not common for most taxpayers facing debt issues. Understanding these nuances is important when you file bankruptcy.

Discharging Income Tax Debts: The Key Rules

Getting rid of income tax debt through bankruptcy is possible. But you have to meet several specific conditions. These rules are sometimes called the “discharge rules” for income taxes in Chapter 7. Many people find these rules helpful. Let’s look at them simply.

1. The Three-Year Rule

Generally, the income tax debt must be for a tax year for which the tax return was last due at least three years before you file bankruptcy. This includes any extensions you got for filing your individual income tax return. For example, if your 2019 individual income tax return was due April 15, 2020 (or October 15, 2020, with an extension), three years from that original due date would be April 15, 2023. You’d typically need to file bankruptcy after that date for those 2019 taxes to be potentially dischargeable. Keep careful track of these dates related to your federal tax obligations.

2. The 240-Day Rule

The tax must have been “assessed” by the IRS at least 240 days before you file bankruptcy. An assessment happens when the IRS officially records that you owe the tax. This can occur when you file your tax return (self-assessment) or if the IRS assesses the tax after an audit or by creating a Substitute for Return (SFR). The assessment date can be different from when the tax return was due, especially if there were audits or amended returns. You can request your tax account transcript from the IRS, often through your online account, to find these assessment dates for your income tax.

3. The Tax Return Filing Rule

You must have actually filed a tax return for the debt you want to discharge. This return must have been filed at least two years before you file for bankruptcy. If you never filed a return for that tax year, the debt generally cannot be discharged. Filing late returns, even years after the due date, might count, but the return must be considered a legitimate, good-faith filing by the IRS and the bankruptcy court, not merely a reaction to imminent collection or bankruptcy. Simply providing your Form W-2 information to the IRS is not the same as filing a complete tax return.

4. No Fraud or Willful Evasion

The tax debt cannot be the result of a fraudulent tax return. It also cannot be from a willful attempt to evade paying taxes. If the IRS believes you acted fraudulently or willfully evaded your tax payment obligations, that tax debt will likely stick with you, even after bankruptcy. Honesty in your tax filings and cooperation with the internal revenue service are very important; attempts to hide income or claim false deductions can lead to non-dischargeability. Consulting with tax pros can help avoid such issues.

These rules primarily apply to federal income taxes. State income taxes often have similar rules, but there can be differences. It is important to check the rules for your specific state’s revenue service. You might want to get help from a tax professional or a bankruptcy attorney to understand how these apply to your individual income and tax situation.

What About Other Types of Tax Debt?

Income taxes are a big concern. But people often owe other kinds of taxes too, such as estimated taxes if self-employed. What happens to these in bankruptcy?

Payroll Taxes and Trust Fund Taxes

If you’re a business owner and you withheld taxes from employee paychecks (like income tax, Social Security, and Medicare), these are called “trust fund taxes.” The government views these very seriously. You were holding this money “in trust” for the government. Generally, these trust fund recovery penalties or direct liabilities are not dischargeable in bankruptcy. This means you will likely still owe them, and the IRS has strong tools to collect these amounts personally from responsible individuals.

Property Taxes

Property taxes are usually secured debts. They are secured by your property. Bankruptcy typically doesn’t wipe out a lien for property taxes. If you want to keep your property, you’ll need to pay these taxes. A Chapter 13 bankruptcy can sometimes help you catch up on past-due property taxes over time through the repayment plan, preventing foreclosure.

Sales Taxes

If you collected sales tax as a business owner but didn’t send it to the state, this is often treated like trust fund taxes. It’s usually not dischargeable in bankruptcy. States take these obligations very seriously and have their own collection methods. These tax debts often remain after declaring bankruptcy.

Occasionally, taxpayers might have dealings involving tax-exempt bonds or obligations to Indian tribal governments, which can have their own specific tax rules and implications in a bankruptcy case. While less common, these specific circumstances would require careful review by a specialist.

Chapter 7 vs. Chapter 13 for Tax Debt

How does choosing between Chapter 7 and Chapter 13 affect your tax situation? Let’s look at that. Your choice will have a big impact on your path forward.

Chapter 7 Bankruptcy and Taxes

Chapter 7 bankruptcy is aimed at discharging eligible debts. If your income taxes meet all the rules (three-year, 240-day, tax return filed, no fraud), they might be wiped out. This is a powerful outcome when dealing with significant tax debts. But if your taxes don’t meet these rules, or if they are non-dischargeable types like trust fund taxes, Chapter 7 won’t eliminate them.

You could still owe those non-dischargeable taxes after your Chapter 7 case closes. The IRS can then start collecting again, possibly affecting your bank account or wages. However, Chapter 7 might free up your income by getting rid of other debts, like credit cards or medical bills. This could make it easier to deal with any remaining federal tax or state tax debt, perhaps through an installment agreement.

Chapter 13 Bankruptcy and Taxes

Chapter 13 bankruptcy involves a repayment plan. This plan lasts three to five years. You make monthly payments to a bankruptcy trustee. The trustee then pays your creditors. Chapter 13 can be very useful for tax debt, even for taxes that aren’t dischargeable, allowing for a structured tax payment schedule.

Here’s how Chapter 13 can help with taxes:

• Repay Non-Dischargeable Taxes: You can pay off non-dischargeable tax debts over the life of your plan. This is often more manageable than dealing directly with IRS collection actions. Penalties and interest might stop growing on some tax debts once you file bankruptcy.
• Catch Up on Secured Taxes: If you have a tax lien on your property from the internal revenue service, Chapter 13 can give you a way to pay the underlying tax debt and potentially save your property.
• “Cram Down” Possibilities for Older Liens: In some limited situations with older tax liens, you might be able to modify them through Chapter 13. This is quite technical and requires expert advice.
• Discharge Some Debts: Even if some taxes are paid in the plan, you might still get a discharge of other eligible debts at the end of your Chapter 13 plan. This can include some older income taxes that might not have met all the Chapter 7 rules but can be managed in a Chapter 13, potentially related to your individual income tax return.

Deciding between Chapter 7 and Chapter 13 is a big step. It depends on your income, your assets, the types of debt you have, and your goals. Talking with an experienced bankruptcy attorney is usually the best way to figure this out, as they can analyze your entire financial picture, including any issues with international filers or complex assets. Using tools like a tax withholding estimator in the future can help prevent similar issues.

The Importance of Filing Your Tax Returns

You may have heard this before, but it’s critical. You generally must have filed tax returns for debts you want to discharge. If you haven’t filed tax returns for several years, the IRS might have filed a “substitute for return” (SFR) for you. An SFR usually doesn’t count as a filed tax return for discharge purposes in bankruptcy, as it’s not a return filed by you. This can create big problems if you intend to file bankruptcy to address the debt arising from that year.

If you are behind on filing tax returns, it is often a good idea to get them filed as soon as possible, ensuring you have all necessary documents like your Form W-2. Even if you can’t pay what you owe right away, filing the return starts the clock ticking on some of those timing rules we talked about earlier. It also shows you are trying to comply. You may need help from tax pros to prepare past-due returns, or even an amend return if errors were made on previously filed ones. If you’ve been a victim of identity theft related to taxes, you might have an Identity Protection PIN (IP PIN) which is necessary for filing.

Getting these filings done is a key step before you consider trying to file bankruptcy if it haven’t paid my taxes. For some, using the IRS Direct Pay system or the Electronic Federal Tax Payment System (EFTPS) might be options for current tax payment obligations while addressing past issues.

What About Tax Liens?

If the IRS or state has filed a Notice of Federal Tax Lien, this means they have a legal claim to your property. A tax lien secures the government’s interest in your assets, like your house or car. Bankruptcy typically does not make a properly filed tax lien just disappear. This is an important point to understand when considering if you can file bankruptcy if it haven’t paid my taxes.

Even if the underlying tax debt itself is discharged in a Chapter 7 bankruptcy (meaning you no longer personally owe it), the lien can remain attached to your property. This means if you sell that property, the IRS could get paid from the proceeds. In some cases, liens can be avoided on certain property in bankruptcy if they impair your exemptions, but this is a complex area of law requiring careful legal analysis of your specific bankruptcy case. Checking your online account with the IRS might provide information on existing liens.

In Chapter 13, you generally have to pay secured claims, like those from tax liens, through your repayment plan if you want to keep the property. The value of the lien on your property is important here. Again, getting advice for your situation from knowledgeable tax pros or bankruptcy attorneys is very useful. You can learn more about tax liens from sources like the official website of the Internal Revenue Service concerning federal tax liens.

Don’t Wait Too Long To Get Help

Tax problems tend to get worse over time. Penalties and interest can add up quickly. If you are struggling with tax debt and are thinking about whether you can file bankruptcy if it haven’t paid my taxes, it’s wise to explore your options sooner rather than later. Facing these issues head-on can feel hard, but there are paths forward; simply hoping the tax debts will disappear is not a solution.

A bankruptcy attorney who understands tax issues can look at your whole financial picture. They can review your tax records and your filed tax returns. They can help you understand which debts might be dischargeable. They can explain the pros and cons of Chapter 7 and Chapter 13 for your specific case. They can help you decide if declaring bankruptcy is the right step for your tax payment troubles.

They can also explain other options you might have for dealing with the IRS, like an Offer in Compromise or an Installment Agreement. An installment agreement allows you to make monthly payments on your tax debt over time. Sometimes these can be alternatives or companions to bankruptcy. The Federal Trade Commission offers general information about bankruptcy that you might find helpful as a starting point, but specific tax questions need more focused advice from qualified professionals.

Take a Deep Breath and Explore Your Options

Dealing with unpaid taxes, especially when you’re worried about lawsuits or losing your home, is incredibly stressful. The thought to file bankruptcy if it haven’t paid my taxes is a serious one. It brings up a lot of questions about your tax return history and future tax payment obligations. Remember, you do have options.

Understanding how bankruptcy law treats tax debt is the first step. Knowing about the different rules and how Chapter 7 and Chapter 13 work can give you a better sense of control over your federal tax situation. It’s not about finding loopholes. It’s about using the legal processes that are there to help people get a fresh start when they are overwhelmed by debt, including tax debt. Making sure your current tax withholding is correct using tools like the tax withholding estimator can help prevent future problems.

Reach out for professional guidance. A consultation with a qualified bankruptcy attorney can make a world of difference. They can help you make an informed decision about what’s best for you and your family when you file bankruptcy if it haven’t paid my taxes. There is hope, and there is help available from the internal revenue service and other avenues.

Conclusion

Thinking you need to file bankruptcy if it haven’t paid my taxes is a difficult position to be in. Bankruptcy can be a very effective tool for managing or even eliminating certain tax debts. But the rules are detailed, affecting every aspect from your income tax return to outstanding tax debts. Success often depends on factors like the age of the tax, the type of tax, and whether tax returns were filed with the revenue service.

Both Chapter 7 and Chapter 13 bankruptcy have different ways of addressing tax liabilities. For example, a Chapter 13 payment plan might be structured to handle non-dischargeable tax debt, while Chapter 7 might wipe out older, qualifying income tax. Getting advice from someone who knows this area of law well can help you understand your specific situation with the Internal Revenue Service and make the best choice for your financial future when you file bankruptcy if it haven’t paid my taxes.

The Law Office of William Waldner offers free consultations. Contact us today to schedule yours at 212-244-2882.