Since we’re right in the middle of tax season, let’s talk a little bit about it and owing too much income tax.
Hello, this is Darrell Castle. I’m an attorney licensed to practice law in the state of Tennessee and on this video today, I’m talking about income taxes and how those taxes are handled in bankruptcy.
And the answer is, primarily, you can discharge income taxes in Chapter 7 bankruptcy – that means you don’t have to pay them back if they are at least 3 years old and if you filed your tax returns on time and you did not commit tax evasion, tax fraud or something like that. Then those taxes should be dischargeable in chapter 7 bankruptcy and you should not have to pay them back.
Now they’re other ways you can deal with taxes in bankruptcy.
Instead of chapter 7, let’s talk about chapter 13. Let’s say that your income tax is not 3 years old, so that it’s not dischargeable, you can still include it through chapter 13 and that will allow you to avoid the interest and penalties that would otherwise accrue. Interest and penalties on income tax accrue very very quickly. It’s pretty easy to owe twice as much as you actually owe if you’re not careful.
You can include your income tax that’s not dischargeable in a Chapter 13 and deal with it that way – pay it all back over a period of time of 5 years. So that at the end of the 5 year period, you’re out of debt and you don’t have the worries that you once had.
Also, chapter 13 allows you to include all your other debts so that you have a manageable and affordable payment and you can deal with all your debt at the same time.
See, one of the problems is that if you have a situation where you have old tax debt or you’re struggling to pay your taxes, you probably have other financial problems as well. These things usually don’t operate in a vacuum. It’s like you have some type of symptom – you have pain or something’s wrong with you physically and you go see a doctor, the doctor is going to examine you because he wants to know what’s causing these problems. He sees that you have certain problems that need to be addressed, so you might want to have someone look at your entire financial picture, but you can discharge certain income taxes in chapter 7 and you can include those that are dischargeable or non-dischargeable – whichever- in chapter 13 and that’s the way it is.
So, pay your taxes and pay attention out there folks when you’re dealing with the IRS.