October Tax Season: A Dozen Key Questions about Tax and Bankruptcy–Part 2

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Q&As about tax refunds, whether and when to file late tax returns, joint tax debts with ex-spouses, getting rid of tax liens, and more.

 

Here is the second half of a dozen important questions and answers about how bankruptcy can help solve your tax debt problems.

Today you get the short answers, but more thorough answers will come in our blog posts during the next several weeks until the October 15 extended tax filing deadline. There will be a full post on each question and answer. So please come back to our website for these.

 

7. What happens with my tax refund (which is owed to me but has not yet arrived) if I file a Chapter 13 “adjustment of debts” case instead of a Chapter 7 one?

You can usually keep the refund or more likely use it for a designated purpose. But in some situations you might actually want to give it to the Chapter 13 trustee as part of your plan for payment of debts that you want or need to be paid.

And in other situations—when you really need the refund but can’t be assured that the bankruptcy court would let you could keep or use the refund—it’s best to hold off on filing your Chapter 13 case until you receive and appropriately spend that refund.

8. If I haven’t flied one or more years of income tax returns, should I file them with the IRS/state, and if so, when?

Generally it’s better to file your tax returns sooner rather than later because the clock starts running to discharge (legally write off) an income tax only when the return for that tax is filed. But if you currently have one or more years of unfiled tax returns, and know that you owe taxes on the unfiled year(s) (and maybe for an earlier year or two), you should see an experienced bankruptcy attorney as soon as possible. There are some complicated timing considerations that have to be applied to your unique circumstances.  With careful pre-bankruptcy planning you can often discharge more taxes.  

9. If my ex-spouse owes income taxes am I liable, too?

If you filed joint tax returns you are both usually liable. Each of you is legally obligated to pay the tax (and all interest and penalties) in full. You would continue to be liable even if you later got divorced and your divorce decree said that your spouse must pay the tax. The divorce court does not have the power to erase your liability in the eyes of the IRS/state.

But under limited circumstances you may be able to get relief from this liability under either the “innocent spouse rule,” the “separate liability election,” or through “equitable relief.”

If you don’t qualify under any of the above and are still married, the tax at issue can likely be dealt with in a helpful way either by filing a joint Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts” with your spouse. If you are no longer married, you may be able to either discharge (permanently write off) your tax liability through Chapter 7 or pay it over time under favorable terms through Chapter 13.

10. How do I get rid of a recorded tax lien on my home?

Outside of bankruptcy, you usually have to pay off the tax debt in full to get a release of the tax lien.

In bankruptcy, under some circumstances you would not have to pay anything to get the lien released. In other circumstances you would have to pay part of the tax. Or you may even have to pay it in full, although on a flexible payment schedule while being protected from the tax authorities.  

The main factors determining which of these it will be are 1) whether the tax at issue meets the conditions to be discharged (legally written off) in bankruptcy, and 2) whether there’s any equity in the home for the tax lien to attach to, and if so how much equity.

11. If I’m a business owner, how can I keep my business operating while getting help catching up on my overdue taxes?

Whether you owe personal income taxes or employee withholding taxes, or both, if you are a sole proprietor you can keep your business operating while slowly catching up on your back taxes. And while you are doing so you don’t have to worry about the tax authorities putting tax liens on your real estate or business equipment, grabbing money out of your business or personal bank accounts or from your cash till.

12. How can I write off (more of) my tax debts with smart planning?

Most income taxes can eventually be discharged if you take the right steps and then wait long enough. It may be worth waiting to file your bankruptcy case at the right time.

But, first, it’s crucial to take all the right steps or else a lot of your time and effort could easily be wasted. Second, you need to know how to satisfy the taxing authorities in the meantime as inexpensively as possible, and while minimizing the risk that they will take action against you. Third, you need to fit this tax game plan into what is going on with the rest of your creditors and with the rest of your life so that you are being guided by the best overall strategy.