Is It Possible to Discharge Tax Debts Under a Chapter 13 Bankruptcy?

October 21, 2013

  As any Rochester accountant will assert, you are required to repay your tax obligations throughout the agreed term of your Chapter 13 repayment plan. Discharging – or wiping out – your tax debts is not possible even under a declared state of bankruptcy and, hence, the Internal Revenue Service (IRS) will consider your non-dischargeable tax debts as due and outstanding. In this regard, you may still require the services of a Rochester accounting firm like Rizzo, DiGiacco, Hern&Baniewicz for tax and finance planning purposes.

But the IRS can be generous, too, in the sense that the government tax agency categorizes tax debts in Chapter 13 bankruptcy into two, namely, priority and non-priority. Priority taxes must be repaid in full while non-priority taxes can be paid partially during the agreed repayment period of the bankruptcy repayment plan, which can last between 3 and 5 years. Suffice it to say that you may escape certain debts but not your back Rochester taxes even when filing for Chapter 13 bankruptcy

Priority Tax Debt

Under Chapter 13 bankruptcy, you are not required to sell any of your assets to pay back your tax debts immediately since you can repay over the term of the bankruptcy; in contrast, priority taxes in Chapter 7 bankruptcy must be paid immediately. Plus, you have the opportunity to pay these taxes at 0% interest rate as granted by the bankruptcy court, which the IRS cannot oppose.

Ask us, one of the best Rochester consulting firms, or ask a Rochester CPA how this can be achieved. You can never have too much information and too much guidance when it comes to overcoming the challenges of bankruptcy! You may even seriously consider CFO outsourcing for your business soon after.

The priority taxes that must be repaid in full during the term of the bankruptcy are:

• Tax liens, which are liens on debts attached to property (secured tax debts) 

• Recent property taxes, which pertain to property taxes incurred before the bankruptcy filing and payable within a year before said filing 

• Taxes that the taxpayer/bankrupt individual is required to withhold and then remit to the appropriate agency (i.e., Medicare, payroll taxes, and FICA as well as sales taxes) 

• Certain excise taxes, employment taxes, and customs duties 

• Non-punitive tax penalties 

• Erroneous tax refunds related to non-dischargeable tax debts 

 If your tax debts are the results of a sales tax audit and a labor audit where sales taxes and income taxes, respectively, are involved, then you are more likely to pay for these obligations in full. Sadly, these are not akin to a non-taxable non-profit account where the IRS cannot get its hands on. 

Non-priority Tax Debts 

 All non-priority tax debts are lumped with unsecured debts like credit card debts in a Chapter 13 repayment plan. Keep in mind that unsecured debts have two important aspects, namely, these are paid after the all of the secured and priority debts have been paid, and these cannot be fully discharged although these can be paid at a fraction of their original amounts. Also, the strict requirements for classifying tax debts as non-priority in a Chapter 13 bankruptcy is the same as in Chapter 7 bankruptcy. 

  The bottom line: 

You will still pay for your debts regardless of your present financial situation now.

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