Bankruptcy Indiana

Yesterday I answered a blog reader's questions about married people who file bankruptcy. Today I want to deal with several tax-related reader questions that came up in the past week or so, asking to whether bankruptcy can help with tax debt.

One of the big myths about filing bankruptcy in Indiana is that you can never get rid of tax bills.  As a bankruptcy attorney for close to twenty five years, I can tell you we get rid of old income tax bills for clients all the time.  Back taxes for both individuals and for small businesses is an area in which we have been able to get millions of dollars in debt discharged.

There are certain types of taxes for which bankruptcy is no help.  This includes taxes withheld from your paycheck by an employer and sales taxes. Income taxes less than three years old do not qualify for forgiveness under the Indiana bankruptcy laws. According to the CPA Journal, a discharge of tax debt can be granted if the taxes due are three years old (meaning the last date for filing the return without penalty was more than three years before the bankruptcy petition).  The tax returns filed must have been filled out honestly, with no attempt to deceive the IRS or to use resources the filer had available to satisfy other personal obligations rather than pay the tax. The point emphasized by the CPA Journal is an important one for me to emphasize in this Indiana bankruptcy blog: Taxpayers should file their returns on time even if they do not have funds to make full payment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
John Ventura, author of The Bankruptcy Handbook, warns that "If you fall behind on your federal taxes and you don't contact the IRS to work out a way to pay your debt, the agency may decide to use its considerable powers to collect the money that you owe." Those powers might mean any or all of the following things:

1.  IRS putting a federal tax lien on your assets - you won't be able to sell, transfer, or borrow against your assets

2.  IRS seizing assets, including home, commercial property, or land, car, boat, fine jewelry RV, etc.

3.  IRS seizing money in your bank or retirement account, commissions, rental income, and wages.

"Given the serious and possibly long-lived consequences of owing past due taxes to the IRS," concludes Ventura, when the IRS sends you a notice, get in touch with a tax CPA or with a bankruptcy attorney right away!

One of the ways an attorney can be of assistance is helping you compare two options for dealing with tax debt:

IRS Offer of Compromise - Sometimes the IRS will allow a taxpayer to settle their income tax liability for less than the full amount owed.  Interest and late penalties, however, continue to run under this plan.

Chapter 13 bankruptcy - Depending on the facts of the case, the bankruptcy judge has the power to discount some debts, including older tax debt.  Chapter 13 allows debtors to make installment payments without being harassed by creditors (including the IRS). 

It's a myth that tax debt cannot be helped through bankruptcy, but choosing and executing the right plan, with the help of professional legal guidance, as early in the process as possible, is the first step in tax debtors' journey towards a new financial start.