I’ve heard if you owe taxes to the IRS, you can’t discharge them in Bankruptcy. Is that true?
Unsecured income taxes due for past years that returns were filed on may be eligible for discharge. Our firm has handled these types of matters for many years and many of our clients have been relieved from tax debt that they would never have paid in their lifetime. Congress understood that tax debt can spiral out of reach of payoff and provided statutory relief for these types of debt.
Not all taxes are discharged in bankruptcy and the timing rules are complicated. If you owe taxes it is in your best interest to consult with an attorney who handles tax/bankruptcy matters.
If you have both dischargeable and non-dischargeable income taxes Chapter 13 offers a payment arrangement that prevents interest and penalties while you are in the bankruptcy. You will know exactly how much it will cost to pay off your taxes and that when you complete your plan payments.
We advise our clients to make sure they don’t owe and don’t receive a refund during their Chapter 13. It may mean adjusting their withholding. In Chapter 13 all refunds are turned over to the Chapter 13 Trustee, who then pays the unsecured creditors a larger percentage. Tax refund money is paid to unsecured creditors on the theory that a tax refund is the same as disposable income; had the correct amount been withheld there would be more take home pay instead of a tax refund. More take home pay increases the amount of monthly disposable income. The plan payment is based on monthly disposable income. Higher monthly disposable income increases the percentage the unsecured creditors receive. Withholding the correct amount also prevents new tax debt. The goal for our clients is to, on discharge, be free from crushing IRS debt.
If you do not handle your tax debt then when you retire the IRS will be able to garnish your social security and retirement income.