Bankruptcy and Taxation Issues in Arizona
A failure to pay taxes could get you in trouble with the IRS but what’s the situation like when you have filed for bankruptcy? Are you entitled to any kind of tax exemption in this situation? The answer depends on the specific circumstances. Some Arizona residents may be capable of discharging certain taxes and here’s how the goal can be accomplished. Read on to know about bankruptcy and taxation issues in Arizona.
Which Taxes can be Discharged?
The first and most important thing to understand is that under Arizona bankruptcy law, all collections enforced by the IRS will be stopped the minute a person files for bankruptcy. There are also specific provisions pertaining to the manner in which IRS is going to be treated from that point forward.
When bankruptcy is declared, the IRS gets the status of a creditor. Taxes, however, fall under the category of priority debt. In some instances, priority debt will be dischargeable (see the examples below). If it’s not dischargeable, priority debt will have to be paid first whenever financial resources become available.
Individuals filing for both Chapter 7 and Chapter 13 bankruptcy may be eligible for income tax debt discharging. In order for this to happen, however, certain conditions will have to be met:
- The due date for filing the tax return should be at least three years prior to the date of declaring bankruptcy
- The tax return was filed at least two years before the date
- The individual has a tax assessment that’s dated at least 240 days back
- There’s no record of tax evasion by the individual
- There’s no evidence of the tax return being fraudulent
Because of the numbers mentioned above, these conditions are sometimes being called the 3-2-240 rule. This is the only situation in which a complete discharge of tax debt will be possible.
Following the above-mentioned requirements, it is possible to discharge several different kinds of personal income taxes, corporate taxes and non-trust-fund employment taxes.
A complete discharge of debt is possible under Chapter 7 bankruptcy. Individuals who file for a Chapter 13 bankruptcy may be given a three to five year program that will be put in place for the purpose of at least partial debt repayment.
Taxes that can’t be Discharged in Arizona
While some types of tax debt may be eliminated altogether by the individuals who file for Chapter 7 bankruptcy, there are specific types of payments that have to made regardless of the circumstances of the bankruptcy and taxation.
Income tax could be discharged but there are other taxes that will still have to be paid by the individuals who file for a Chapter 7 bankruptcy. These taxes include:
- Trust fund taxes
- Unfiled tax return debt
- Non-punitive tax penalties
- Erroneous tax refunds
What’s the Alternative?
Even if you can’t get rid of taxes altogether, there are possibilities for reducing the amount you have to pay back or getting a more lenient schedule.
Filing for Chapter 13 bankruptcy is the alternative to Chapter 7 bankruptcy.
Individuals who file for a Chapter 13 bankruptcy will be asked to pay the priority portion of their tax debt. A specific payment plan will be set up through the bankruptcy, making it possible to eliminate tax debt without incurring significant financial burden.
Going for an IRS payment plan is another option. Individuals who meet all of the entity’s requirements will be entitled to a specific monthly installment agreement. Such an agreement features a more lenient repayment schedule that will be in effect until the tax debt is paid in full.
Anyone who has a lot of tax debt should talk to an experienced attorney to fully understand bankruptcy and taxation issues. The lawyer will review income, assets, other types of debt and financial history to determine the benefits of the bankruptcy, what type of bankruptcy to file for and if such a decision makes sense at all. If possible, a lawyer will also help you undertake the necessary steps to discharge certain kinds of tax debt.