Bankruptcy can eliminate “old” taxes. It’s that time again when we all have to settle up with the IRS and the California Franchise Tax Board (FTB). If you owe the IRS or FTB debts for old taxes, you can eliminate those debts with a chapter 7 or 13 bankruptcy.
Taxes that can be eliminated must be at least three years old, measured from the date that the tax return was due. For example, as of April 15, 2014, you can get rid of income tax owed for 2010 (tax return due April 15, 2011) and prior tax years, assuming that you did not filean extension. (If you did file an extension, you would have to wait until October 15, 2014 to get rid of a debt for 2010 taxes.) You also must have filed your tax return at least two years before filing your bankruptcy.
So, if you’ve been waiting to file bankruptcy in order to eliminate old tax debts, as of April 15, you can prepare and file your bankruptcy and get rid of those taxes.
If you are about to file a chapter 13 bankruptcy, you must file your tax return now, even though tax law allows you to file for a continuance. But if you are filing a chapter 7 bankruptcy, you may file an extension and file your taxes by October 15.
If you expect to get a refund from the IRS or FTB, you must protect (in bankruptcy lingo, “exempt”) the amount that you expect to receive. If you don’t, your chapter 7 trustee will take some of the refund (prorated depending on when you file bankruptcy) and use it to pay certain creditors, or your chapter 13 trustee will add the amount of the refund to how much you have to those creditors.
If you have old income tax debt, contact a bankruptcy attorney to discuss whether chapter 7 or chapter 13 bankruptcy would be right for you. Our consultations are free and this could be the best financial move that you make.