As a millennial, you could be nervous as to how deal with your back taxes owed to the Internal Revenue Service (IRS). But, Uncle Sam has got a number of well-graduated tax debt relief parameters to help you pay off your outstanding taxes with ease.
One of the most effective ways to pay off tax debts is by filing Chapter 7 bankruptcy. Like any other debt relief options , be it credit counseling or debt settlement, you can straighten up your finances and start afresh.
When your tax debt can be eliminated
Your tax debts can be discharged under Chapter 7 bankruptcy, if you meet the below mentioned conditions:
Outstanding income taxes – Your income tax is
dischargeable. But, payroll taxes or debt incurred due to penalties slapped for tax fraud won’t be wiped out through bankruptcy.
Qualified 240-day rule – You’ve passed the IRS “240-day rule”. Either your tax debt hasn’t been assessed by the IRS or your tax debts were assessed at least 240 days, before you filed for bankruptcy. The deadline of this rule can be extended, in case, the IRS suspended all forms of tax collection activities against you due to an ongoing offer in compromise proceeding or an earlier bankruptcy petition.
3 Year old back taxes – Your original tax return must have been due for at least 3 consecutive years, before filing your bankruptcy petition.
Authentic tax returns – You never committed tax fraud or tried to evade taxes. However, if you’ve tried to cheat the IRS by filing a false tax return or have been convicted of tax evasion, like using a fake Social Security number to file your tax return, then filing bankruptcy would be useless.
Punctual tax filings – You must have filed a tax return at least 2 years prior to your bankruptcy application. If you’ve filed your tax return late, and meanwhile, the IRS has filed a separate tax return on your behalf, then the court may reject your tax return. You won’t be able to discharge that tax. However, there are some courts where you can have your tax debts discharged, provided you’ve filed a late return and meet the other specified criteria.
When your tax debts cannot be discharged
When slapped with overwhelming tax obligations, it’s important that you take your finances a bit more seriously. So, if your tax debts fall under the categories discussed below, then your tax obligations won’t be discharged in Chapter 7 bankruptcy:
Property taxes – If you’ve incurred property taxes payable one year prior to filing for bankruptcy, then that tax debt remains undischarged (or is nondischargeable). Under Chapter 7 bankruptcy, you can discharge back taxes accrued on your properties (without any penalty) payable more than a year before your bankruptcy petition. Many counties attach liens to properties immediately after a tax assessment or one year later. Liens against properties due to outstanding property taxes cannot be discharged through Chapter 7 bankruptcy. It sticks around even if a property owner’s personal liability from the tax has been waived off.
Faulty tax refunds & penalties – If you’ve received non-punitive tax penalties related to nondischargeable taxes, then it will remain undischarged under Chapter 7 bankruptcy. The event or the transaction that triggered the penalty should have happened less than 3 years before your bankruptcy filing date. Faulty tax refunds or credits related to undischarged taxes will also survive your bankruptcy case.
Tax liens – Chapter 7 bankruptcy can cancel all your personal obligations to pay off your income tax debts. It can prevent IRS from usurping your bank account or having your wages garnished. But, if you’ve been slapped with a tax lien (also referred to as secured taxes), then it’ll remain attached to your property. Tax liens can be applied to your property even before you’ve filed for bankruptcy protection. Your tax liability would be waived off, but, when you sell your property, then you’ll have to clear off the lien attached to it from the profits you make out of the deal.
Third party taxes – If you owe taxes that must be collected or withheld by a third party like ‘Trust fund’ taxes that include Medicare, FICA, or income taxes that an employer is required to withhold from its employees’ paycheck, then they are nondischargeable. Moreover, sales taxes paid by a debtor’s clients/customers which he/she is obligated to send to a federal or state unit are nondischargeable too.
Selective employment taxes – Some outstanding employment taxes, custom and excise duties are nondischargeable, but to a certain time limit.
Never mess with Uncle Sam
Believe it or not, IRS officials enjoy more power than any other federal employees. They have the power to either turn your life into a bliss or make it a living hell. If you want to deal with them successfully, then you’ll need to respond to their correspondence with diligence.
However, if you don’t heed to that
piece of advice, then you could face the music. Consequences of not paying off your back taxes are as follows:
Ruined job and business prospects
Lien against home and foreclosure
IRS tax lien filed against you
Bank account levy
Corporate employment tax assessments
An exceptionally high monthly installment tax payment amount
IRS can establish a line of communication with your neighbors, friends, bankers and other corporate relations, regarding your tax liabilities
Impound third-party asset transferees.
Bankruptcy, as a means to get debt relief, isn’t suitable for all. Still, you could have some of your back taxes, like selected state or federal taxes, discharged through Chapter 7 bankruptcy. To help you with debt relief efforts and give your financial life a makeover , there are other bankruptcy alternatives to pay off your outstanding tax bills in easy monthly installments. You can also have all or part of the interests waived off on your taxes.
Bankruptcy and tax laws are complex. Work with a seasoned tax and bankruptcy attorney to help you manage both effectively.