Does Bankruptcy Clear Taxes? Discharge IRS, California and CDTFA Debts
One of the biggest burdens faced by California residents is heavy taxes. One of the biggest myths out there is that you cannot clear tax debts in a bankruptcy case.
Even a relatively small tax debt owed to the Internal Revenue Service can seem overwhelming if one is unemployed or has a lot of other expenses. IRS and FTB collection tactics seem relentless. Receiving a constant stream of harassing letters threatening legal action, liens, wage garnishment, or the levying of accounts can be frightening. Individuals often feel like they have no way out.
The truth is that California residents CAN, in fact, eliminate and clear certain tax debts in bankruptcy.
Some taxes are never dischargeable in bankruptcy. These include:
- Property Taxes
- Excise Taxes
- Taxes Required to Be Collected or Withheld: These include so-called “Trust Fund” taxes and employee payroll taxes assessed to business owner
When you file a bankruptcy Petition, an automatic stay goes into effect which requires creditors including the IRS to stop all collection efforts. The stay provides a much-needed break from IRS and FTB harassment. It is possible to eliminate certain tax debt fully through a Chapter 7 bankruptcy or, to repay it over time through a Chapter 13 or Chapter 11 case. There are very specific requirements which must be met to discharge any tax obligation. It is critical to know to what extent your taxes can be discharged before filing any bankruptcy case.
As a bankruptcy attorney in California since 1991, I have successfully discharged and resolved tax debts for my clients in hundreds of cases and understand how to determine whether a tax debt can be discharged. Contact me today to learn if your tax debts can be handled in a bankruptcy case.
Los Angeles Bankruptcy Attorney Helps To Clear Tax Debt From IRS, FTB and CDTFA
Income and Sales Tax Debt Discharge
All of the following requirements must be met to discharge any federal (IRS) or state taxes (California Franchise Tax Board) for whatever periods taxes are owed:
- it has been more than 3 years since the required tax returns were last DUE (including extensions) to be filed for the tax period owed,
- the returns were timely filed (including extensions) or it has been at least 2 years since the returns were filed and no substitute return (“SFR”) has been filed by the taxing authority,
- there was no fraud involved or attempts to evade the tax, AND,
- the taxes were not assessed within the last 240 days.
There are numerous exceptions and events which can extend the time periods on the above rules. It is necessary for a lawyer with bankruptcy tax discharge analysis experience to obtain account transcripts from the taxing agencies and analyze them for specific information. There should be enough information then to determine to a higher degree whether or not a given tax can be cleared in bankruptcy.
Even if you cannot get rid of your tax debt fully in a Chapter 7 bankruptcy case, you may be able to discharge some of it. And for any tax debt that is not dischargeable you can, in a Chapter 13 or Chapter 11 case, enter into a more favorable repayment plan for the non-dischargeable taxes than you otherwise could outside of bankruptcy.
Sales Tax Debt to California Department of Tax and Fee Administration (CDTFA or SBOE)
The analysis for discharging sales tax debts owed to the California Department of Tax and Fee Administration (CDTFA), formerly known as the State Board of Equalization (SBOE), is the same as for income taxes discussed above. But due to how sales taxes are assessed, it can be tricky. Sales taxes flow from a business. If the business was a corporation, then you have to wait until the taxes are actually assessed against the individual responsible for the taxes. Then there must be at least 240 days after that assessment date before a bankruptcy case is filed, assuming all other requirements for discharge have been met.
Often the assessment is the result of an audit. And these audits sometimes show “willful efforts to evade paying tax.” In these instances, that is a basis for the discharge of those tax debts to be denied.
There are other nuances involved with sales tax dischargeability. I have a lot of experience dealing with sales tax debts and know how to obtain the necessary information prior to filing a case so I can advise on the ability to discharge the sales tax debt.
California Bankruptcy Attorney Assisting with Income and Sales Tax Debt
Tax discharge analysis is very specialized and complex. Many experienced bankruptcy attorneys are not comfortable giving an opinion on whether taxes can be cleared in bankruptcy. As a bankruptcy lawyer, I have counseled clients in my Los Angeles Area office for over 30 years on tax discharge options. Contact me now if you face a tax debt that you cannot pay and want to learn more about whether it can be removed through bankruptcy.
Open communication is a hallmark of my representation and I promptly respond to client questions. All work is done by me, a bankruptcy attorney, in my Burbank, Los Angeles office. No paralegals or assistants.
Bankruptcy cases are only filed by our office after weighing all alternatives and analysis of the pros and cons of filing.
Our firm serves many cities and counties in California, including counties of Los Angeles, Orange, Santa Barbara, Riverside, San Bernardino, Ventura, San Luis Obispo, and cities including Burbank, Glendale, Sylmar, Panorama City, Simi Valley, San Fernando Valley, Irvine, Santa Clarita, Oxnard, Huntington Beach, Ontario, Rancho Cucamonga, Corona, Torrance, Agoura, Long Beach, San Fernando, Van Nuys, Sherman Oaks, North Hollywood, Anaheim, Hollywood, Riverside, San Bernardino, Lancaster, Palmdale, Pasadena, and many more.
Frequently Asked Questions (FAQ’S) About Taxes And Bankruptcy
Can I Clear Sales Tax Debt Owed to the CDTFA and SBOE?
The analysis for discharging sales tax debts owed to the California Department of Tax and Fee Administration (CDTFA), formerly known as the State Board of Equalization (SBOE), is the same as for income taxes discussed above. But due to how sales taxes are assessed, it can be tricky. Sales taxes flow from a business. If the business was a corporation, then you have to wait until the taxes are actually assessed against the individual responsible for the taxes. Then there must be at least 240 days after that assessment date before a bankruptcy case is filed, assuming all other requirements for discharge have been met.
Often the assessment is the result of an audit. And these audits sometimes show “willful efforts to evade paying tax.” In these instances, that is a basis for the discharge of those tax debts to be denied.
There are other nuances involved with determining sales tax dischargeability. I have a lot of experience dealing with sales tax debts and know how to obtain the necessary information prior to filing a case so I can advise on the ability to discharge the sales tax debt.
What Happens to Tax Penalties in Bankruptcy?
If a tax is fully dischargeable, then that includes all penalties (and interest). However, there are times you can eliminate tax penalties even where the underlying tax principal is not dischargeable. In a Chapter 7 case, you can clear tax penalties if the underlying tax event which triggered the penalty occurred more than 3 years before the bankruptcy case is filed. And, even better, in a Chapter 13 case you can discharge all tax penalties even if the tax principal is not fully dischargeable. Often penalties make up a large portion of total tax debt, so this can be a real benefit to those in need.
What Happens to Tax Liens in Bankruptcy Chapter 7 or Chapter 13?
Tax liens can be very problematic so it is always best to file bankruptcy before a tax lien is recorded. Where the debtor does not have a lot of assets, it is not really a problem. In a Chapter 7 case, depending on the amounts, the IRS and FTB will usually release their lien if the value of property to which it attached is low.
As with any statutory lien, a bankruptcy discharge does not affect the lien. What this means is, even though the underlying debt was discharged, the lien remains against whatever property to which it attached prior to the bankruptcy filing. For personal property items, like clothing, cars, and household items, the lien will typically be voluntarily released after a bankruptcy discharge. But when real estate is involved, they will retain their lien and get paid upon sale of the property or refinancing of senior mortgage loans. The IRS also retains liens against retirement accounts.
In a Chapter 13 or Chapter 11 case, this becomes more trouble because technically the value of the lien must be paid in full during the plan term (36 to 60 months in Chapter 13) unless otherwise agreed by the taxing authority. For large lien amounts, this can obviously cause a problem with being able to afford the necessary plan payments.
Another issue with tax liens in bankruptcy, particularly the IRS, is that exemptions do not protect you from tax debts. So even if you have a large homestead exemption that would normally protect your property from being sold in a Chapter 7 case, if there are IRS liens against the property, the property can still be sold by the Trustee. So, it is important to carefully consider in these instances whether a Chapter 13 or Chapter 11 case might be better.
Dealing with tax liens is a complicated matter. Contact us if you would like to learn how you can resolve your tax debts and liens.