Tax Debt In Bankruptcy

Many times I will encounter clients that haven't filed tax returns for the most recent tax year and even years prior because they knew that they were going to owe taxes. There are many people that owe money to the IRS or the state that can't pay the taxes when the tax return is due to be filed. However, failing to file the tax return is going to make a bad situation worse. Tax authorities assess a penalty for filing a return late and the later the return is filed, the bigger the penalty will be. Additionally, if you fail to file a tax return for too long, the IRS may file a return for you. These substitute returns normally reflect a much higher tax liability than you ever would have owed if you would have filed the returns yourself (as much as triple the actual tax liability, in my experience). What's worse is that when these substitute returns are filed, it can often eliminate the ability of a taxpayer to discharge the income tax in bankruptcy. Believe it or not, when income tax gets to be of a certain age, it can be treated the same as a credit card in bankruptcy. This is a very complicated calculation of how the tax must age in order to be dischargeable. However, a simple explanation (that has exceptions, of course) is if the return was filed by the taxpayer at least two years prior to filing the bankruptcy and the return was last due more than three years prior to the filing of the bankruptcy, then the income tax is dischargeable. Just this week, I filed a bankruptcy for an individual with taxes owed from tax year 2011 of over $70,000.00. He will emerge from this bankruptcy owing the IRS nothing for that tax year. Even if the income tax owed can't be eliminated altogether, you can file a reorganization type of bankruptcy that will allow you to repay the government in an environment where the interest and penalties owed will stop accruing once the bankruptcy case is filed. You also are protected from levies and seizures by the government while in the bankruptcy because of the automatic stay, a powerful law that puts a protective wall between you and your creditors (including the government). If you or someone you know is facing difficult tax problems, please have them give us a call for a free first appointment at our Cincinnati location.
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