Discharging IRS Tax Debts
Many clients from the Northern Kentucky and Greater Cincinnati areas, through a wide variety of circumstances find themselves in serious financial turmoil. Often times a change in employment, the death of a family member or personal illness create this perfect financial storm. Often times our clients find themselves in debt not only to medical bills and credit cards but to the Internal Revenue Service as well. There are a lot of myths about what happens to tax debt in Chapters 7 and 13.
Federal Taxes in Cincinnati Bankruptcy
The dischargeability of these tax debt situations is extremely complex and full of uncertainty. The lawyers at the Steiden Law Firm are trained and experienced at identifying these tax issues. Counsel with extensive experience and superior training bring a sense of confidence to the Debtor’s in otherwise frightening situations.
By identifying these issues early on, before filing, informed and educated decisions about which Chapter to file can be discussed and planned. Your Steiden Law Offices lawyer’s duty is to provide the highest level of representation in all aspects of your Bankruptcy case.
Call today to set up a free consultation at one of our offices, located in Cincinnati, Covington or Florence, KY.
As a small business owner or the proprietor of a self-employed business, you are responsible for the payment of several different types of taxes known as Payroll Taxes for your employees. These include mandatory contributions to unemployment compensation, Withholding taxes and Social Security Compensation, all of which may have been withheld out of your employee’s paychecks but not remitted to the IRS. Many lawyers call these Trust Taxes. These Trust type taxes are not dischargeable, nor is the interest and penalties which accrue with them.
Income Tax Liabilities
As an employee you fill out an IRS form W-4 which instructs your employer how many Dependents you may have and what level of deductions you desire to withhold from your paycheck each pay period. Some employees under withhold so at the end of the year, they do not have sufficient withholding to cover the actual tax liability on their realized income.
If you do contract work in addition to your regular employment, you will likely receive an IRS Form 1099 for this contract labor. This Contract Income does not have a mechanism for withholding so at the end of the year the contract income is added to the regular income and creates a larger taxable income, much larger than the withholding amounts your IRS W-4 Form covered. At the time of filing, instead of getting a tax refund, you find yourself owing a substantial amount of money.
Tax Interest and Penalties
When a Client finds themselves in debt to the IRS they soon find out that interest and penalties begin to accrue starting with the initial month of non-payment. There are penalties for late filing, late paying, under-paying and simple non-payment. What may start out as a small tax debt soon turns into a snowball of debt, growing as it rolls down a steep hill. Before too long, this small debt is now large and continues growing in double-digit numbers. Eventually, in not too long a period of time, the Internal Revenue Service will file and record a Federal Tax Lien to help facilitate the collection of the tax debt and the ever-increasing penalties and interest.
Federal Tax Liens
The Internal Revenue Service has the right, by Statute to cause to be recording in the County where you reside, a Federal Tax Lien. Federal Tax Liens are governed and controlled exclusively by Federal Law and prevail over local laws including state law exemptions.
Bankruptcy may, in certain circumstances, cause a tax debt to be discharged but the Federal Tax Lien is not a ‘debt’ which can be discharged. It is not a debt at all, it is a lien which secures the tax debt. The question which your lawyer can examine and advise you of is whether the lien attaches to any property at all. If you do not own real estate or significant personal property, the Lien is deemed to be unattached.
Once the bankruptcy is filed, provided the tax debt will be dischargeable, the lien will not attached to after acquired property. Your lawyer will advise you how these rules and exceptions apply to your unique situation.
Dischargeability is the Exception
As a general rule taxes are not dischargeable in Bankruptcy. As with almost all rules, there are well known exceptions. Payroll taxes and the corresponding interest and penalties for fraud are not eligible for discharge and can best be addressed in a Chapter 13 Wage Earner Repayment Bankruptcy. It is important to advise and disclose these types of tax liabilities in your intake consultation. If you have correspondence from the Internal Revenue Service, even if you do not understand the content, make certain to share these with your attorney at the consultation.
Discharge in Chapter 7
Income taxes have certain requirements in order to be subject to the Discharge in your Chapter 7 case. The first consideration is that there was no effort on the Debtor’s part to wilfully and illegally evade payment of taxes. This consideration usually involves more than simple non-payment. The use of fraudulent dependents or a false Social Security Number are usually present in a willful evasion situation.
The IRS must have already assessed the liability at least 240 days prior to your Chapter 7 filing or have not assessed the liability as of the filing date. Finally, the tax return which gave rise to the tax debt must be filed at least three years prior to your actual filing date. If your tax debt meets this criteria, your attorney will counsel you on the steps to obtain a ruling and formal declaration of Discharge through the filing of an Adversary Proceeding, which is a lawsuit against the IRS within the Bankruptcy. Provided your facts meet the requirements, the Court will enter an order declaring the tax debt to be formally discharged.
Finding a Bankruptcy Attorney to Assist With Your IRS Debts
By providing dedicated service to our clients, we have helped thousands of families work through hardship and uncertainty in their financial situations. We have helped countless families negotiate through rough financial seas with a steady and calm demeanor. Steiden Law Offices take tremendous pride in serving the families who make their homes in our neighborhoods in the Northern Kentucky and Greater Cincinnati areas.
We are your neighbors and there is nothing more motivating and fulfilling than providing legal services in our communities where we as lawyers make our own homes. The process of serving our clients is one of caring, of listening of explaining and communicating with our clients. It is through this superior communication that our lawyers become better advocates which in turn allow them to serve our old and new clients better at the highest levels of advocacy found in the legal profession.