Treatment of tax debt in bankruptcy is complicated, which leads to a great deal of confusion. The common belief that you can’t discharge tax debt in bankruptcy isn’t accurate. In fact, the Internal Revenue Service (IRS) specifically calls out bankruptcy as an option for managing tax debt on its website. But, the opposite statement doesn’t tell the whole story, either. Some tax debt is dischargeable in bankruptcy and some is not, and the analysis involves some contingencies. Determining whether or not your tax debt is dischargeable requires more than simply categorizing it as income tax, property tax, payroll tax and so on.
Potentially Dischargeable Tax Debt
Federal Income Tax Debt
Federal income tax debt may be dischargeable in bankruptcy, but the analysis is complex. For income tax debt to be dischargeable:
- The due date for the tax return filing (including any extensions) must have been at least three years prior to the bankruptcy filing date
- The return must actually have been filed at least two years prior to the date the bankruptcy petition is filed
- The IRS must have assessed the tax liability at least 240 days prior to the filing of the bankruptcy petition
- The taxpayer must not have submitted the return fraudulently, or attempted to evade tax liability
If you’re considering bankruptcy and have unpaid tax debt, it is important to work with an experienced local bankruptcy attorney to assess dischargeability and calculate these timelines before taking action, since your filing date may determine whether or not income tax debt can be discharged.
Nevada State Income Tax Debt
State income tax debt in Nevada is dischargeable on the same terms as federal income tax debt. In other words, if the state income tax return was due at least three years prior to filing bankruptcy, was actually filed at least two years before the bankruptcy petition, was assessed at least 240 days before filing and there is no fraud or tax evasion involved, the debt may be discharged.
Nevada Property Taxes
Personal property tax debt may be dischargeable in bankruptcy, but is subject to a timeline analysis similar to that applied to income taxes. A property tax debt can’t be discharged in bankruptcy unless the last date to pay the tax without penalty passed at least one year prior to filing of the bankruptcy petition. The assessment and payment timeline for property taxes differs from place to place. In Nevada, property taxes are due four times per year, in August, October, January and March. However, the specific due date varies from year to year. The last day to pay Clark County property taxes without penalty—the day that starts the one-year clock–is currently 10 days after the due date.
Tax penalties are typically discharged along with dischargeable tax debt. Under some circumstances, some penalties may be discharged even when the underlying tax debt is not.
Non-Dischargeable Tax Debt
In addition to taxes that do not mean the timeline tests or involve fraud or evasion, there are certain types of tax debt that are by their nature non-dischargeable. These are typically business-related taxes, such as payroll taxes and sales tax—taxes the company is required to collect and submit on behalf of someone else, such as a customer or an employee.
These taxes are sometimes at issue in consumer bankruptcy cases because sole proprietors and general partners in business are typically personally liable for debts of the business. In rare cases, an individual who was responsible for collection and management of these taxes may be held personally liable even though the business was a corporation or LLC.
Tax Liens and Bankruptcy
While personal liability for tax debt may be discharged in bankruptcy, it is important to note that bankruptcy doesn’t eliminate a tax lien levied prior to the bankruptcy filing. Thus, while some tax debts become dischargeable with the passage of time, others
Managing Tax Debt through Chapter 13 Bankruptcy
Those struggling with non-dischargeable tax debt may be able to find relief through the Chapter 13 bankruptcy process. Although this type of tax debt won’t be wiped out in bankruptcy, a Chapter 13 repayment plan may allow the debtor to pay the full balance in manageable monthly installments over a period of three to five years.
While this approach won’t decrease the amount of the tax debt, it can stop further penalties from accruing during the repayment period, halt tax collection efforts, and create a predictable repayment schedule that is based on the debtor’s income and expenses.
Talk to a Nevada Bankruptcy Attorney about Managing Tax Debt
Because the treatment of tax debt in bankruptcy depends on a wide range of factors, including the type of tax, the due date, the filing date, and whether the taxpayer’s actions may be deemed fraudulent or evasive, the best way to determine whether bankruptcy might provide the relief you need from tax debt is to talk with an experienced local bankruptcy attorney. Because timing plays an important role in determining whether or not many tax debts are dischargeable, it is to your advantage to gather this information as early as possible.
The bankruptcy attorneys at Haines & Krieger are among the most experienced in Las Vegas, and our firm has helped thousands of people get out of debt through Chapter 7 bankruptcy or manage debts while preserving assets in Chapter 13.
Fill out our contact form right now, or call us at 702-903-1398 to schedule a free consultation.