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Bankruptcy laws are created by the government, so it should be no surprise that when you owe the government money, the rules for obtaining tax debt relief can be a lot tougher. However, you do have options for dealing with unpaid taxes in bankruptcy.

At John T. Turco & Associates in Omaha, we will help you understand the tax implications of bankruptcy. We can help you navigate through your filing bankruptcy while you owe the IRS taxes, owe property taxes, or are past due on employment taxes.

Options for Managing Taxes and Bankruptcy

It is an urban legend that you simply cannot do anything about unpaid taxes in bankruptcy. The bankruptcy laws for taxes are very intricate and depend on many aspects of your financial situation. Below are just a few broad generalizations about certain types of tax debt.

  • Federal income taxes: If these are more than three years old, they can usually be discharged in bankruptcy. If not, you can pay them back over the course of three to five years with no interest or penalties in Chapter 13 bankruptcy.
  • Property taxes: If you are planning to give up your house as part of your bankruptcy proceedings, you will not be liable for any unpaid real estate taxes.
  • Employment taxes: If you are a business owner and owe back payroll taxes on your employees, these generally cannot be discharged in small business bankruptcy. However, there may be some exceptions.

It may also be important to know that if you owe enough unpaid taxes, you will qualify for Chapter 7 bankruptcy, even if you would not otherwise pass the means test under that chapter.

Plan Carefully to Avoid Unpleasant Surprises

There are many “gotchas” involved in filing for bankruptcy when you have tax debts. For instance, if you filed for an extension on your income taxes, or if you did not file an accurate tax return on time, your ability to discharge your tax debts could be affected.

Failing to take all the intricacies of the law into account could result in unexpected outcomes. Our attorneys are devoted to carefully examining all of the issues before filing bankruptcy. We will get your transcripts from the IRS and assemble all the other documents we need to understand the best ways to approach your tax debts.

We can help. Contact us to speak to one of our experienced tax bankruptcy lawyers or to arrange a free initial consultation. If you cannot come to our Omaha offices, we can consult with you by telephone.

Learn More With Our Bankruptcy and Tax FAQs

Income taxes can be discharged in bankruptcy under certain conditions, but these are very technical conditions that include:

  1. The tax return must have been due at least three years before filing bankruptcy.
  2. The tax return must be on file for at least two years before filing bankruptcy.
  3. The income taxes must have been assessed more than 240 days from the date of filing bankruptcy.

The trick is to fully understand these conditions and to verify the data before filing.  It is doable and income taxes are dischargeable in bankruptcy if the proper conditions are met.

All other types of taxes (not income taxes) cannot be discharged in bankruptcy.

In a word, no. However, bankruptcy forces you to get your taxes filed because you simply do not qualify to even be in bankruptcy with unfiled returns.  Many people have unfiled returns and many don’t even have the underlying information to file such returns.  Yet, a person needing to file bankruptcy must somehow and someway, get the returns filed.  Sometimes the returns aren’t perfect, but just do your best and seek out help.  There are many good tax preparers that can assist with this issue before filing bankruptcy.

Property taxes (also known as real estate taxes) in Nebraska and Iowa do not get discharged in bankruptcy but it is rare to see personal liability attached to property taxes.  In other words, the delinquent property taxes attach to the real property and ultimately, if not paid, a tax foreclosure likely will occur.

However, property taxes can be paid back in Chapter 13 cases.  In essence, you can stop a tax foreclosure and potentially get up to five years to pay them back, with interest.  To be clear, you can’t “wipe out” property taxes in bankruptcy, but you could buy time to pay them back.  If you surrender the property, then it is highly unlikely that you’ll ever have to pay them.

Yes, under certain circumstances, it is possible to remove a tax lien in a bankruptcy case. But, there are other circumstances where you cannot.

It depends on a lot of variables:

  • If a Chapter 13 bankruptcy is filed, and if there is no equity to secure the tax lien, then it could be “stripped” away from the property.
  • Also, there are many instances in which a tax lien could be partially removed, again based on the amount of equity in the asset.
  • Finally, there are other times when a tax lien cannot be removed in bankruptcy, usually when there is sufficient equity in the property or other asset to cover the tax debt.

No. This is prohibited under federal law.

Income taxes are the only type of tax dischargeable in bankruptcy under certain circumstances noted above.

Yes, as noted above there under certain conditions where income tax is dischargeable in Chapter 13.

Yes, as noted above there under certain conditions where income tax is dischargeable in Chapter 13.

Yes, the automatic stay does apply to tax collection efforts. Taxing authorities, including the IRS, must comply with the automatic stay and go through the proper channels if they seek to obtain relief from the automatic stay. The automatic stay can stop tax levies and tax foreclosure sales.

Chapter 13 bankruptcy is often an ideal solution to tax problems.

Yes and no. It depends on the situation:

  • On the one hand, the IRS and state governments have the right to “offset” your refund to pay for past due taxes from prior tax years.
  • On the other hand, if your tax refund is being garnished for delinquent student loans or other non-tax reasons, then the bankruptcy would likely protect the refund.
  • Additionally, in Chapter 13 cases, future tax refunds are protected.

There is hope, but a bankruptcy attorney needs to consider numerous facts to determine whether quickly filing bankruptcy would protect a refund.