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THE
NEW AND IMPROVED
UTAH BANKRUPTCY LAW HANDBOOK
TAX
DEBTS
HOW TO
ELIMINATE YOUR TAX OBLIGATION IN A CHAPTER 13 OR A CHAPTER 7 BANKRUPTCY
TAX
DEBTS AND CHAPTER 13 OPTIONS
In a Chapter 13 case, the Debtor formulates a plan to re-pay their Creditors
over a three to five year period. The Debtor makes a single monthly payment to
the Bankruptcy Trustee who distributes the payment among the Debtor's
Creditors in the manner set forth in the Chapter 13 Plan. Tax debts are
generally non-dischargeable in bankruptcy. However, Chapter 13 can offer
significant benefits in dealing with taxing entities.
THE IRS IS FORCED INTO ACCEPTING AN INSTALLMENT
AGREEMENT
In a Chapter 13
case, the Debtor can force the IRS into accepting an installment agreement as
part of the Chapter 13 re-payment Plan formulated by the Debtor. The Chapter 13
Plan must provide for full payment, in deferred cash payments, of all tax claims
entitled to priority under Section 507(a)(8) of the Bankruptcy Code, unless the
taxing entity, such as the IRS, agrees to different treatment.
INTEREST STOPS ACCRUING ON UNSECURED TAX
OBLIGATIONS
If the IRS has not filed a Notice
of Federal Tax Lien
against a Debtor's assets prior to the
date the Debtor initiates a Chapter 13 case, interest stops accruing on the
unpaid tax liability. If the IRS has filed a tax lien, the tax obligation is secured
by the lien, and interest must be paid on the tax debt to the extent of the
value of the underlying collateral. For example, if you owe the IRS $8,000, and
own property worth $5,000, interest would continue to accrue only on $5,000 of
the tax debt. The remaining $3,000 portion of the tax debt would be unsecured.
TAX PENALTIES CEASE TO ACCRUE
From the instant a Debtor files a Chapter 13
case, tax penalties to the IRS and Utah State Tax Commission stop accruing. Moreover, tax penalties
are treated in the same manner as all other unsecured claims in the Debtor's
Chapter 13 case. Therefore, if a Debtor's
plan provides for partial payment to unsecured creditors, the Debtor would be
permitted to partially re-pay tax penalties also.
CONSIDER AN OFFER IN COMPROMISE TO THE
IRS
In a Chapter 13 case, the Debtor
must pay all of its Creditors within a three to five year period; and unsecured
Creditors are often paid only a fraction of the original debt. Debtors will
generally be able to pay their Creditors within this three to five year time
period. However, if a Debtor owes a significant amount of non-dischargeable tax
debt, the Debtor may be unable to repay the tax debt along with all of his or
her other debts, within the appropriate time frame. In this case, a Debtor may
wish to consider negotiating an offer in compromise with the IRS wherein the IRS
may agree to reduce the tax debt and accept favorable terms for re-payment of
the tax debt.
TAX
DEBTS AND CHAPTER 7 OPTIONS
In a Chapter 7 case, all property owned by a Debtor becomes property of the
bankruptcy estate upon initiation of the case. The Debtor is permitted to keep
all exempt property, and all other property is turned over to the Bankruptcy
Trustee for sale and distribution of the sale proceeds to Creditors. Debtors
with non-exempt property they desire to retain should file Chapter 13 bankruptcy
to preserve their assets as Debtors are permitted to keep all property in a
Chapter 13. In Chapter 7, almost all of a Debtor's
debts are completely eliminated, and the Debtor emerges from Chapter 7 debt
free. Certain debts, however, are not dischargeable in bankruptcy, including tax
liabilities. Certain tax liabilities, however, may be discharged in bankruptcy.
UNSECURED TAX DEBTS CAN BE DISCHARGED IF FOUR
CONDITIONS ARE MET:
1.
The Debtor did not file a fraudulent return or attempt to evade
paying taxes;
2.
2-YEAR RULE. The liability is for a tax return actually
filed at least two years before the date the bankruptcy case is
initiated;
3.
3-YEAR RULE. The tax return was due at least three years,
including any time or extensions, at least three years before the date
of filing the bankruptcy petition;
4.
240 DAY RULE. The taxes were assessed at least 240 days
before the date of filing of the bankruptcy petition.
Basically, the tax debt must be old.
How old? At least 3 years and a day from the date of assessment.
Also, the tax debt cannot be for a business or withholding - you can only
discharge tax debts that are for personal income tax purposes. For
example, tax obligations from a 1040 return. The above time periods are extended based on certain specific actions such as
a prior bankruptcy filing, pending Offer in Compromise, and other limited
actions.
TIP: Timing can be important in attempting to discharge old tax liabilities. Consult
with a bankruptcy attorney to evaluate the proper time for you to file
bankruptcy to enable you to take advantage of the Chapter 7 discharge.
DISCLAIMER
NO INFORMATION OR MATERIALS CONTAINED HEREIN ARE INTENDED
TO CONSTITUTE LEGAL ADVICE, AND IS NOT APPLICABLE TO ANY SPECIFIC SET OF FACTS,
ESPECIALLY AS TO ANY INDIVIDUAL'S PERSONAL SITUATION. THE INFORMATION
CONTAINED HEREIN NOR THE PERUSAL OF IT DOES NOT
ESTABLISH NOR CONSTITUTE AN ATTORNEY-CLIENT RELATIONSHIP WITH EVELAND &
ASSOCIATES OR ANY OF ITS ATTORNEYS.
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