Income Taxes in Bankruptcy

Income Taxes in Bankruptcy2019-04-16T03:49:52-07:00

This article discusses an unpleasant subject for most people, taxes. As the old saying goes, there are only two things that are certain in life, death and taxes. If you are reading this, you have only dealt with one of those certainties. A question often asked of my Phoenix clients is: “Will a bankruptcy discharge my income tax debt?” The short answer is, maybe. Most people we talk to here in Phoenix, Arizona believe that taxes cannot be dealt with in a bankruptcy. As discussed below, this is not entirely the case.

Most of you are familiar with income taxes. In a bankruptcy, taxes are classified into three different classifications. They will either be classified as secured, unsecured priority or unsecured non-priority. The classification of the taxes will determine if you can discharge them in a bankruptcy.

If a tax lien has been filed against your property, it is classified as secured. In Arizona, the tax lien is filed in the County Recorder’s office of the County in which you reside. So, obviously, if you live in Phoenix, the tax lien would be filed in the County Recorder’s office of Maricopa County. Generally, if the taxes are classified as secured, they are not dischargeable and you will continue to owe those taxes.

In order for an income tax to be classified as an unsecured priority claim, it must meet one of the following criteria:

•1. It must be for a tax year that ended on or before the date of filing the bankruptcy petition. 11 U.S.C. § 507(a)(8)(a).

•2. It must be for a tax that the tax return was due, including any extensions, within three years before the filing of the bankruptcy petition. 11 U.S.C. § 507(a)(8)(a)(i)Please note that if you are granted an extension to file, the return will be due on the date the extension ends.

•3. It must be for a tax that was assessed within the 240 days of filing the bankruptcy petition. 11 U.S.C. § 507(a)(8)(a)(ii)

When calculating the three year period, calculation begins on the date the return is due, not on the day you actually filed your return. In most cases that will be April 15
th unless you requested an extension. If you requested an extension, the three year period begins to run at the expiration of the extension. 11 U.S.C. § 507(a)(8)(a)(ii)(I). When calculating the 240 day assessment period, the 240 days are suspended for the time an offer in compromise is being negotiated or was in effect, plus an additional 30 days. 11 U.S.C. § 507(a)(8)(a)(ii)(II).

An income tax classified as an unsecured priority claim is not dischargeable and you will still owe the taxes after bankruptcy.

Any other income tax liability will be discharged and you will not owe it after your bankruptcy is complete.

A Chapter 13 Bankruptcy may be worth considering should you find yourself with income taxes that will not be discharged. In a Chapter 13, the unsecured priority portion of a tax claim stops accruing interest and late penalties and is paid over a three to five year period depending upon your income. Any secured tax claim in a Chapter 13 Bankruptcy will accrue interest, but it will not accrue any late fees.

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I am an Arizona attorney and my articles only pertain to Arizona and Federal Bankruptcy Law. All legal services offered to Arizona residents only. This article should not be construed as legal advice, if you need to file a bankruptcy in a state other than Arizona, contact an attorney in your state.

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