Are you grappling with the weight of back taxes? At DiLucci CPA Firm, we often encounter clients curious about whether bankruptcy relieves their tax burdens. Let’s untangle this complex topic together.
Understanding Bankruptcy and Back Taxes
Bankruptcy often appears as a beacon of hope for those drowning in debt, including overdue taxes. However, the intersection of bankruptcy law and tax obligations is intricate. Not all tax debts are eligible for discharge in bankruptcy. Specific criteria must be met, and certain types of taxes, such as trust fund taxes, are generally not dischargeable.
- Limits on the Amount that Can Be Garnished: Under federal law, specific limits exist to how much of your income can be garnished. Generally, the lesser of the following two options can be taken:
- Up to 25% of your disposable income (after legally required deductions like taxes and Social Security).
- The amount by which your weekly income exceeds 30 times the federal minimum wage.
- Right to Receive a Legal Notice: You must receive a legal notice before your wages are garnished. This notice should inform you of the garnishment and the reason for it. The notice typically includes information about the debt, how much you owe, and instructions on proceeding if you wish to dispute the debt or the garnishment. Receiving this notice gives you time to prepare and, if necessary, take action to challenge the garnishment.
- Opportunity to Dispute the Garnishment: You can request a court hearing to dispute the garnishment. This must be done within a specified time frame, often indicated in the garnishment notice. You can fight the garnishment if you believe it’s invalid or incorrect. For instance, if the debt has already been paid, if the amount is wrong, or if you are incorrectly identified as the debtor. In some cases, you may claim exemptions based on your financial situation. For example, if the garnishment would cause you or your family extreme financial hardship, you might be eligible for an exemption or reduction in the garnishment amount.
- Protection Against Employment Termination: Federal law protects you from being fired if your wages are garnished for any one debt. However, this protection might not apply if your wages are garnished for multiple debts.
- Other Considerations: You often can negotiate directly with the creditor. This could result in a more manageable payment plan, potentially avoiding garnishment. Seeking advice from a lawyer or a financial advisor can be beneficial. They can help you understand your rights, overcome the legal process, and explore all possible solutions.
Overcoming the Maze of Conditions
- Type of Tax Debt: Generally, only income taxes are eligible for discharge in bankruptcy. Other types of taxes, such as payroll taxes, trust fund taxes, and specific penalties, are not dischargeable.
- Timing of the Tax Debt: The tax debt must be related to a due tax return, including any extensions, at least three years before the bankruptcy filing. For example, if you file for bankruptcy on April 30, 2023, the tax return should have been due (including extensions) on or before April 30, 2020. The IRS must have assessed the tax at least 240 days before filing for bankruptcy. This rule accounts for any recent assessments or re-assessments of your tax debt.
- Filing History: You must have filed the tax return for the debt in question at least two years before filing for bankruptcy. This rule emphasizes the importance of filing your tax returns, even if you cannot pay the tax. The tax returns must be legitimate and accurate. The debt is not dischargeable if the return is fraudulent or involves a willful attempt to evade paying taxes.
- Absence of Fraud or Willful Evasion If the tax debt arises from a fraudulent tax return or there was an intentional act of evading taxes, such debts are not eligible for discharge. The bankruptcy court will examine the nature of the tax liability and any associated conduct. This can include underreporting income, hiding assets, or making false statements to the IRS.
- Chapter 13 Bankruptcy: If your tax debts are not dischargeable under Chapter 7, you might still address them through a Chapter 13 repayment plan. While the debt may not be discharged, you can manage the repayment in a more structured and often more affordable manner.
Alternatives to Bankruptcy for Tax Relief
While bankruptcy might seem like an attractive option, it’s not the only path to tax relief. At DiLucci CPA Firm, we explore all avenues, including IRS payment plans and offers in compromise. These alternatives can provide a more suitable solution for your tax challenges.
Contact DiLucci CPA Firm for Personalized Tax Solutions
As a family-run firm since 2005, we at DiLucci CPA Firm pride ourselves on nurturing long-lasting relationships with our clients. Our comprehensive services, from tax planning to resolution, aim to empower you financially. We’re dedicated to helping you find the best path forward through bankruptcy proceedings or alternative solutions. Call us in Texas at (972) 444-9934 or reach out online to schedule a consultation. We’ll find a path that aligns with your financial goals and needs.