How to Bankrupt Income and some Trust taxes

How do you bankrupt Income and Trust taxes and be certain it will work?  Your taxes fall due every year around Easter.  When you file your taxes on time the debt becomes dischargeable generally 3 years after the return became due.

Income and Trust taxes

Income and Trust taxes

The return must be filed at least 2 years before you file and bankruptcy. There must be no assessment at least 240 days prior to filing the bankruptcy.  Plus there must be no effort to evade the tax.  This is similar to tax fraud, but courts have been strict at times when they disallow even minor acts to evade paying the tax.

Tax resolution companies are often an expensive scam.   Many bankruptcy attorneys don’t know the 5 major steps and have not worked for the tax department.  The rules can be difficult to understand.  Calculating the exact date income taxes are dischargeable requires a copy of your tax transcript to see the date the service received a copy of your return and other events in your record.   Here are the rules laid out step by step if you need to bankrupt income taxes.

Remember trust and property taxes are generally not dischargeable.  But the part of trust taxes the business pays may be dischargeable.

Bankruptcy and tax planning

Income and some trust (withholding and sales taxes) are dischargeable in Bankruptcy.  Bankrupting income taxes or the dischargeable portion of a trust tax is largely a waiting game.  Taxes have to be aged like wine until they are old enough to be discharged. And only a couple of methods work.  You cannot calculate when the return is old enough unless you have the tax account transcript and tax codes. The account transcript shows when an assessment was made, the return was filed, and when you made an

offer in compromise.  It is the complete history of your account.  Go here to learn how to get your tax transcript and here is the IRS transcript link.  Accurately determining your tax dischargeability is difficult.  You need a qualified bankruptcy and tax attorney to help plan discharging the tax. This isn’t easy. will calculate when a tax is old enough to discharge.   Be sure to double check the date your tax debt is dischargeable by using this service.

How to Bankrupt income taxes in 5 steps:

1Taxes must be 3 years old to be dischargeable 11 USC 507 (A)(8)(A)(i).

Example if your return was due to be filed on October 15th 2015 because you filed an extension, you count 3 years later. They generally become dischargeable on October 15th 2018. However, this rule is not perfect. Since April or October 15th may have fallen on a weekend you should add 10 days to make sure. Miss the date by one day and you will owe the tax. You can repay taxes in Chapter 13 but miss this rule and you repay 100% of the tax.

2 Returns must be filed over 2 years before you file bankruptcy 11 USC 523 (A) (1) (b).

If the return is not filed and signed by the taxpayer this period never starts. This 2-year rule is the most important requirement. The IRS must have this 2-year opportunity to collect. Filing a signed, and accurate return under oath starts the 2-year waiting period for the tax to be discharged. You have a strong requirement as a business and taxpayer to keep records and report under 11 USC 523 A

3 Wait 240 days after any assessment 11 USC 507 (A)(8)(A)(ii) to file bankruptcy.

When you went through that audit and they gave you an additional tax debt that was an assessment. If they sent you an additional tax bill for cashing in your 401k that was an assessment. The 240-day rule does not count if the assessment was not sent to the last known address, over 3 years after filing the return, the assessment was a re-assessment or the assessment was arbitrary and clearly in error.

4 The return must not be fraudulent or an attempt to avoid the tax 11 USC 523 A 1 b and 11 USC 523 a 1 c.

If you fail to file a tax return the IRS can file a tax return for you. This is called a substitute for return.   They will simply guess what they think you earned. This will be about twice your normal wages and becomes your tax due unless you timely protest it. The failure to file the return, filing an inaccurate return and 20 other acts may be willful or negligent evasion. Fraud or willful evasion makes it difficult or impossible to discharge the tax.   If they file a substitute for return most bankruptcy judges will never allow discharge of the income tax without payment in full. The IRS and taxpayer can file an agreed “SFR” together.  Then the taxpayer has filed a return under oath before an audit is final and the debt is dischargeable.

5 In order to calculate the 2-year rule add any period of time, you were in bankruptcy plus 90 days.

The tax department believes it is fair to them to have at least 2 years to know about the debt and effectively collect from the taxpayer. If you file a bankruptcy before the 2 years they don’t have an “opportunity to collect”.  They feel the debtor has made no reasonable effort at repayment.   Filing a bankruptcy (11 USC 507 a 8 G) is a “tolling event” that extend the 2-year rule and statute of limitation for that period of time plus 90 days.  Filing an Offer in compromise extends the 240 day rule the period of time you were in an offer in compromise application plus an additional 30 days. An offer in compromise is also a “tolling event”.  I always add in my safety 10 day safety period just in case the date falls on a holiday, weekend or the mail was slow.

You can age a return so it can become dischargeable.

If you need to age the return so you can discharge the tax, you may want to enter into a payment arrangement. Using an offer in compromise or filing a bankruptcy stops the clock. Often payment agreements can be for less than the interest on the debt. If you are very poor the tax department may place you into a currently uncollectible status which also ages the account. If you can age the return to make it dischargeable the IRS may claim you need to sign form 656.  This form prevents the account from aging.  Never sign this form.  It is never required.  You want the clock to run out on them

The Statute of limitation for tax collection.

26 USC 6503 Tax liens self-release 10 years after the date of assessment. It requires a signed tax return for the tax to be assessed.  The statute of limitations does not apply to a fraudulent or non filed return. Filing bankruptcy extends the statute of limitations the period of time you are in bankruptcy plus 6 months.

How to Bankrupt Trust taxes

Trust taxes are primarily the withholding and sales taxes when merchants are supposed to hold in trust for the tax department.  The Trust portion of a Trust tax is not normally dischargeable under 11 USC 1328 a and 508 8 D. Notice I said normally.  Every situation is different. There are exceptions to every rule. If you are an employer, and you failed to turnover withholding, you are stuck for the employee portion of the trust tax.

The employer portion is dischargeable since it was not held in trust. Same with sales taxes for the purchaser portion of the sales tax. ONLY THE TRUST PORTION of a 940 trust tax is nondischargeable the other portion can be discharged in bankruptcy.  In some states, the sales taxes are the responsibility of the seller and therefore dischargeable.  In Kentucky, the merchant holds the tax in trust.

The interest and penalties can be eliminated for the unsecured or non-priority portion of tax debts

Income Taxes become due at Easter. This eliminates half or more of a trust tax debt the IRS is requesting. You can take up to 5 years to repay secured and priority taxes which will have interest.  Dischargeable trust taxes use the same rules you use to discharge income taxes.

Miscellaneous tax bankruptcy rules

If you want to file bankruptcy like a pro just download our free book on bankruptcy.  In Kentucky and Southern Indiana come see us to file Bankruptcy.

Real Estate property taxes are statutory liens. They can’t be stripped in bankruptcy because you didn’t consent to them.   Real Estate property taxes are rarely collected personally from the individual.   But it is possible in Kentucky.  The State tax department has purchased tax liens and then collected them in serious cases.

Nick is a former tax department prosecutor and has license # 51 before the United States Tax Court in Washington DC.

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