South Carolina Bankruptcy Lawyer Blog

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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