Can Bankruptcy Get Rid of Tax Debt When the Man Has My Number?

Uncle Sam Wants You(r money)

Written by Rock Hill Bankruptcy Lawyer, Showell Blades

Bankruptcy can be an effective way to get rid of tax debt, but you must first understand some basic principles about taxes and bankruptcy law.

“Let me tell you how it will be.
There’s one for you, nineteen for me.”

So begins my personal favorite Beatles’ song, Taxman, written as a searing attack on the British Crown while the Beatles struggled with Her Majesty’s tax collectors in the 1960s. It would be a welcome tune on any Tea Party mix tape. So, if you’re not John, Paul, George and Ringo, what do you do about taxes, and how does bankruptcy come into it?

Well, about the dumbest thing anyone in these United States can do is fail to file your income taxes.  (Note that I said “file,” not “pay.”)  Whatever harebrained scheme you’ve been told will work to avoid paying taxes is just that, a scheme.  I have seen the biggest, strongest tax protesters quivering in fear when the IRS comes a knockin’ with its arsenal of liens, attachments, garnishments, levies, and the old stand-by, jail time.  Repeat after me:  “I’ll always file my tax returns.”

Now, how will bankruptcy help you when you cannot PAY your taxes?  I don’t have space in this short blog to cover all the bankruptcy rules about discharging or getting rid of tax debt.  I’m just gonna cover the big ones.

Keep in mind that the goal in bankruptcy is to discharge debt.  Taxes are just a form of debt.  The Bankruptcy Code limits the discharge  of tax debt, and all the ins and outs of those provisions are complex.  However, there are special rules you can follow to get rid of (or discharge) tax debt. First Rule is, guess what? You have to FILE your tax returns! Once you’ve filed the returns, even if they are late, then you see if you can discharge the taxes.

The Second Rule deals with time.  You’ve gotta be patient.  You can only discharge income taxes if they’re for a tax debt that’s been due and payable more than three years prior to the date you file bankruptcy.  Simply put, you can’t discharge income taxes for the last three years that are due before you file bankruptcy.

Like everything, it’s not quite that simple.   Income tax returns are due on April 15 of every year. UNTIL April 15, the previous year’s taxes aren’t due and payable.  For example, until April 15, 2010, income taxes for 2009 are NOT due and payable.  That means that if you want to see if you can discharge taxes you’ve gotta wait until after the April 15 deadline for filing for the last three tax years you’re counting. That’s very important if you owe taxes for tax year 2006, for example.  If you file before April 15, 2010, then the last three years you can’t get rid of are: 2008, 2007 and 2006 because 2009’s aren’t yet due and payable.  So, you have to wait.  Be patient and file after April 15, 2010 to discharge 2006 income tax debt.

The other part of the Second Rule dealing with time is that the tax returns themselves have to have been filed more than two years’ prior to the date you filed bankruptcy. That’s real important for you tax protesters out there. If you file ten years’ of income tax returns all at one time you’ve gotta wait to file bankruptcy, even though they’re for tax years that are way more than three years due and payable. You’ve gotta wait until two years from the date you filed all those returns to file bankruptcy or none of the tax debt is discharged.

I can’t remember how many clients I’ve had come in who’ve had to file back returns and wait to file bankruptcy before they could discharge taxes. I had someone the other day who filed about six years of returns for years which all were more than three years ago.  However, they just filed the returns.  Thus, we agreed that they will be patient.  I will be filing bankruptcy for them in 2012 so that two years will have gone by from the date they filed their tax returns.

Space does not permit me to cover all the complexities of income tax discharge issues, and the options available in bankruptcy to deal with them, and this post is no substitute for the advice of an experienced bankruptcy attorney.  But, more information is available on my website on whether you can discharge back taxes and not have to pay them at all in Chapter 7 bankruptcy, whether you can pay a reduced amount and stop penalties and interest from running in a chapter 13 or chapter 11 bankruptcy, and how tax liens and levies are handled.

Just remember the Big Rule: unless you can leave your country like the Beatles, you have to file your taxes.  And you may have to pay them, unless maybe I can help you with them in bankruptcy court.

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About
You can call me Showell. I'm a bankruptcy lawyer in Rock Hill, South Carolina. I've practiced law since 1986, when I filed my 1st bankruptcy. Since then I've filed about 4000 cases for people and businesses. I don’t represent or have much sympathy for creditors, as most of my clients sought help from creditors already and the creditors either were not helpful, or downright rude. My philosophy, as a third generation lawyer and former Boy Scout, is based on my having been taught to be honest, helpful, respectful, courteous and kind, because you never know the problems people have from looking at them. Most folks are honest and good, but have hit brick walls and the cards definitely are stacked against the “little guy.” I’ll tell you your options at a free consultation and take fee payments for as long as you need. I also try to get folks to relax about their problems, as life is just too short to let worrying about finances ruin it. You come up with a plan and work through it; then you move on. I’ve lived in Rock Hill since 1989 and file bankruptcies in the District of South Carolina and the Western District of North Carolina (Charlotte) where bankruptcy has been 95% of my practice since 1993 and 100% since 2000. I was educated mostly in the North Carolina public schools, although I did go to boarding school at Virginia Episcopal School for 11th and 12th grade because my father went there in 12th grade and because, well, I enjoyed an active social life in 10th grade. In 1982 I got a BS in Industrial Relations from UNC- Chapel Hill, focusing on economics and psychology. I also cooked in restaurants, and I still believe it was the best job I’ve ever had. In 1986 I graduated from the University of South Carolina School of Law and practiced in Rocky Mount, NC for 3 years in a three-man firm doing wills, real estate, incorporations, bankruptcies, criminal matters, and divorces. In 1989 I moved to Rock Hill to work for W. Ryan Hovis, a chapter 7 bankruptcy trustee. There I started regularly handling debtor bankruptcies, and reviewing files and handling litigation and meetings of creditors for the trustee. Since 1993 I’ve had my own law firm doing mostly bankruptcy. My professional involvement includes: teaching bankruptcy at South Carolina Bar’s Law School for NonLawyers (see website: ShowellBlades.com); testifying at South Carolina Senate Judiciary Committee and working to change South Carolina exemptions law; lobbying U.S. Congress for favorable bankruptcy laws; working on South Carolina Bankruptcy Law Association board and seminar committee; and as National Association of Consumer Bankruptcy Attorneys’ South Carolina Chair. I also draw cartoons for an SC Bar magazine. On the civic side, I am a deacon at Oakland Avenue Presbyterian Church, and was chair of the Fellowship Committee. I was Chair of the Ann Barron Child Development Center Board, PTO President at my daughters’ school, on the Board of the Catawba Regional Mental Health Center, and Treasurer of the Jaycees. I have been on two medical mission trips to Honduras. My lovely daughters are 22 and 17, and I have one small black pug, two aquariums and two cats. Just because my aquarium at work needs cleaning does not mean I will neglect your file. It’s quite the opposite: the dirtier the aquarium, the busier I am. Hopefully, the dog will not bark at the office. The cats stay home. It's their domain. Feel free to contact me with questions or to make a free appointment: Phone: 803-329-6115 Email: [email protected] Website: ShowellBlades.com

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