“In this world, nothing is certain except death and taxes,” Benjamin Franklin stated shortly after the creation of the US Constitution. Thankfully, he was wrong about at least one of them. Taxes can be eliminated, although it is not easy to do and not everyone can do so. The key to the process? Filing bankruptcy.

Many people have heard the old advice that taxes cannot be written off during bankruptcy. That is only partially true. It can be done, but it is very difficult and is only possible in certain situations. In this post, we will discuss what you need to know to determine if you should pursue writing off tax debt by filing bankruptcy.

 

Understanding Georgia Tax Debt

Tax debt is considered any unpaid taxes. It can be a terrible burden to bear and can dramatically decrease your quality of life, particularly if you’re struggling with other debts. In fact, trying to pay the IRS in addition to repaying your other creditors can quickly lead to serious financial troubles.

The situation is compounded by the powers granted to the IRS. Not only can they require that you repay back taxes, but they charge interest on what you owe. The agency can also garnish your wages, place liens on property, and take other actions (up to filing criminal charges). According to CNBC, “The IRS will continue to levy penalties and charge interest on unpaid tax balances until they are settled. In 2019, the service placed nearly 543,604 tax liens on property and issued 782,735 notices of levy to third parties garnishing income from delinquent taxpayers.”

Even if you’re not facing criminal charges or the potential of having your wages garnished, the interest charged on your tax debt alone can dramatically increase your stress and debt levels. That’s because the IRS charges 0.5% per month in penalties on unpaid tax balances, combined with interest at the current federal short-term interest rate and an additional 3%. What that means is you’ll be paying a great deal in terms of penalties and interest – enough to dramatically increase what you owe if you’re unable to make a big dent in the amount with immediate payments.

 

What Can You Do about Tax Debt in Georgia?

For those struggling with debt, owing the IRS can feel like adding insult to injury. However, there are things that you can do. One of those is to arrange for a repayment plan. If you owe under $10,000, you can do it yourself through the IRS website without much hassle. You don’t even have to provide any financial paperwork. However, if you owe more than that, it’s best to proceed with professional help.

If a repayment plan is not in the cards, you could consider making what’s called an offer in compromise. In this instance, you’re essentially asking the IRS to settle your debt for a lump sum payment that’s less than what you owe. This is not always successful, but it may be worth pursuing depending on your situation.

Finally, there is the possibility of writing your tax debt off by filing bankruptcy. This is perhaps the most complicated of the options available to you and it’s only suitable for those who are thinking about bankruptcy for reasons beyond the taxes that you owe. In other words, you really need to have other debts that make filing bankruptcy a smart decision.

 

Is It Possible to Write Off Federal Taxes by Filing Bankruptcy in Georgia?

The short answer to the question above is “it depends”. Technically, both state and federal taxes can be included in a bankruptcy filing. However, the situation is not as cut and dried as you might like. To write off your federal taxes, they will need to meet the following qualifications:

 

• Income – Any taxes written off through a bankruptcy filing must be income taxes. They cannot be payroll taxes or any other type of taxes. This makes the situation complicated for self-employed individuals, but it is still possible to find tax relief through bankruptcy.

 

• Fraud and Evasion – To write off your federal taxes, you cannot have committed fraud or willfully evaded paying taxes. For instance, you cannot have filed fraudulent returns, used a fake Social Security number, or otherwise evaded paying your taxes (including refusing to file in the first place). If you fall into any of these categories, bankruptcy cannot help, although an experienced attorney can help you find a solution to your tax debt problem that does not involve declaring bankruptcy.

 

• Not Current – You cannot write off current federal income tax debt. That is, the debt that you include in your bankruptcy must be at least three years old. Nothing more current can be included in your filing.

 

• You Filed – This one is in line with the fraud and evasion note above. You must have filed a tax return for the year in question. The return must also have been filed at least two years before the bankruptcy filing. Note that if the IRS filed a return on your behalf, it does not count toward this requirement and you cannot include it with your filing.

 

• Assessment – Finally, your tax debt must stand up to the so-called 240-day rule. That is, the IRS must have assessed your debt at least 240 days before you file for bankruptcy, or it may not have assessed the debt at all. If you have attempted to make an offer in compromise, it extends this limit. Previous bankruptcies will also extend this limit.

 

• Liens – It’s important to note that federal tax liens cannot be discharged through the bankruptcy process. They must be paid in full, either through a payment arrangement with the IRS or through proceeds generated by the sale of the asset against which the lien has been filed (usually a home). It is important to note that if a lien was placed on your property before you filing for bankruptcy, and your bankruptcy case successfully discharged the tax debt, the lien will remain in place and must be paid off before you can sell the property or transfer the title.

 

If you meet the five criteria listed above (everything above the information about tax liens), then Chapter 7 may be the right way to go. You should qualify to have your tax debt discharged. It will also discharge your penalties and any interest that your tax debt has garnered.

 

Managing Tax Debt through Chapter 13

While writing off your tax debt through Chapter 7 might seem the most appealing option, understand that Chapter 13 can offer quite a few benefits that make it pretty appealing for some taxpayers.

 

• Age – If your tax debt is older than three years and is considered dischargeable, there is a chance that it will be forgiven under Chapter 13 without you having to repay it. This depends on the amount of disposable income you’ll enjoy after “reasonable and necessary” expenses have been deducted from your pay.

 

• Liens – While liens cannot be satisfied through Chapter 7, that’s not the case with Chapter 13. In fact, you can add it to your repayment plan so that the lien is satisfied and removed from the property, allowing you to sell it or transfer it to another owner.

 

• Agreement – The IRS is required to agree to your Chapter 13 repayment plan, so long as your outstanding income tax is included and you keep your tax obligations current moving forward throughout the plan.

 

• Credit Cards – If you used a credit card to pay off non-dischargeable tax debt, you can use Chapter 13 to discharge that balance.

 

As you can see, there are some specific advantages to filing Chapter 13 if you have tax debt. However, it’s not the right path for everyone. Working with an experienced attorney will give you the guidance you need to decide whether to file Chapter 7 or Chapter 13.

 

Should You File After Taxes in Georgia?

In most situations, there is nothing to be gained by waiting to file your income tax return until after filing for bankruptcy. In fact, you’ll be asked for your most recent tax return when you declare bankruptcy. If you’re going the Chapter 13 route, you’re required to have your taxes up to date, too.

One thing that surprises many taxpayers is that they need to find a way to exempt their tax returns during the bankruptcy process. These are considered assets, and if you cannot exempt your most recent return, you’ll be required to turn it over to the trustee, who will then use that money to pay your creditors.

 

The Importance of Filing Your Taxes

When you begin your bankruptcy case, you’ll be required to provide your tax information. You’ll need to file it before you have your 341 meeting of creditors, and failure to do so could mean some very serious problems. First, the trustee will give you a very brief window of time to provide your information and if you do not, your case may be automatically dismissed. Second, the IRS might file a best estimate claim, which is bad news because these almost always leave you owing more to the government than if you had just filed the return on your own.

 

The Help You Need

Struggling to decide whether to pursue Chapter 7 or Chapter 13? Not sure that bankruptcy is the best option for your situation? Get in touch with us at Morgan and Morgan. We’ve worked with many taxpayers in your situation, and we can help you decide the best course of action.