Tax Penalties and Bankruptcy

July 11, 2018

Many clients have asked about tax penalties and bankruptcy.  Tax penalties are a difficult burden.  You usually receive tax penalties after an IRS or State Revenue audit or review.  In such as situation, you are usually forced not only to pay the newly assessed tax but also the tax penalty for not following the taxing authority’s rules.  Tax penalties and bankruptcy usually offer no help.  This is because tax penalties are usually not eliminated by filing for bankruptcy.

Tax Penalties are Generally Non-Dischargeable in Bankruptcy

Tax penalties are usually non-dischargeable in bankruptcy.  This means that your “penalty” portion of your tax debt usually cannot be eliminated by filing for bankruptcy.  The penalty portion will remain after your bankruptcy concludes.

Income tax debt itself, however, can sometimes be discharged during a bankruptcy case in very limited situations.  Essentially, the income tax debt must be more than 3 years old (from the filing due date) for it to have a chance of being dischargeable.  This usually means that the tax debt will usually appear to be almost 4 years old or older before it can be discharged.  The tax returns must have also been filed on time.  In addition, you need to file the tax return yourself.  The IRS or other taxing agency cannot have filed the income tax return for you.   Income tax debt can only be discharged in limited situations.  Seek the guidance of an accountant or bankruptcy attorney when attempting to predict when discharging tax debt may be possible.

Tax Penalties Need to be Addressed After Bankruptcy

Tax penalties need to be addressed after filing for bankruptcy.  Complex tax situations frequently require an attorney or accountant to work on the case after a bankruptcy case is filed.  Almost always a substantial amount of tax debt will remain after the bankruptcy case is completed, including tax penalties.  You may be able to negotiate a payment plan, a lump sum offer, or some other reduction of your total tax debt.  This will help you address your tax penalties after the bankruptcy case.

If you have tax problems, you need to work with an accountant.  You must diligently follow the accountant’s instructions or your tax problems will likely persist far into the future.  Ongoing tax problems are usually a systemic problem that must be addressed by bold, life-changing action.   Carefully structuring your life to follow all the rules of the tax authorities will reduce stress.  It will help you to avoid incurring future tax penalties or new burdensome tax debts.

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