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Tax Debt Discharge in Chapter 7 v. Chapter 13

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    Tax Debt Discharge in Chapter 7 v. Chapter 13

    My husband and I were audited for 2016 and 2017 and have joint federal and state tax debt. See below. We filed an extension to file on all returns and filed all returns in the year that they were due. The audit results and the 2016 and 2017 tax was assessed on December 3, 2018. Taxes for 2018 were assessed on Jan. 6, 2019. We have yet to file 2019 but we're going to owe again. We made a $350 a month payment on the fed tax and $25 a month on the state tax. The total owing on the tax is 28,893.26 and growing.

    We're grappling with filing a joint chapter 13 but stalling until we can discharge 2016 and 2017 or having my husband file a chapter 7 now. I've been able to workout payment arrangements with 0% percent interest on most of my cards and so has he. But if we were able to eliminate his debt in a chapter 7 now, we would have so much more breathing room and we could build an emergency savings. He has no secured debt, only the tax debt.

    It's my understand that if he files a chapter 7, he can discharge all his tax debt and I will be the one left owing it. Is this correct in cases where taxes were incurred jointly?

    I suppose he could also just wait to file and not pay his debts being that they're unsecured. We're going to meet with an attorney in a couple of weeks and we want to ask the right questions and not be pressured into filing.

    Lastly, is it ever possible to negotiate some of these penalties off or down? IRS said they wouldn't eliminate the penalties but I will be coming into an inheritance within the year and I want to be strategic about where that money goes and that is another reason for the stall. I want to full fund our IRA accounts for the past two years before filing and take care of any necessary home repairs and medical expenses needed before I file.

    Can someone enlighten me on how tax discharge ability might work in our case? Also out of curiosity, my credit is trashed now but I wonder would more people be concerned about their ability to get credit or getting rid of debt. It's something I struggle with. Thank you.

    Fed Tax 2016 Assessed Income Tax 11,647.23
    Fed Tax 2016 Accrued Failure to Pay Penalty 510.10
    Fed Tax 2016 Accrued Interest 840.42
    Fed Tax 2017 Assessed Income Tax 6,171.91
    Fed Tax 2017 Accrued Failure to Pay Penalty 354.37
    Fed Tax 2017 Accrued Interest 380.71
    Fed Tax 2018 Assessed Income Tax 5,163.00
    Fed Tax 2018 Accrued Failure to File Penalty 1,161.67
    Fed Tax 2018 Failure to Pay Penalty 209.83
    Fed Tax 2018 Accrued Interest 248.35
    State 2018 Income Tax 607.00
    State 2018 Penalty 157.98
    State 2018 Interest 38.79

    #2
    In order to discharge taxes, they must have been due 3 years, a return was filed at least 2 years ago, and if it was an assessed tax, then it has to have been assessed more than 240 days in the past.

    So, 2016 is easy, but 2017 will not be dischargeable until after April 15th 2020. Since the penalties or 2017 tax from the audit was assessed at the end of 2018 there has been at least 240 days elapsed. For the 2018 tax assessment, it has also been at least 240 days.

    Your taxes should be dischargeable.
    Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
    Status: (Auto) Discharged and Closed! 5/10
    Visit My BKForum Blog: justbroke's Blog

    I am not an attorney. Any advice provided is not legal advice.

    Comment


      #3
      Originally posted by justbroke View Post
      In order to discharge taxes, they must have been due 3 years, a return was filed at least 2 years ago, and if it was an assessed tax, then it has to have been assessed more than 240 days in the past.

      So, 2016 is easy, but 2017 will not be dischargeable until after April 15th 2020. Since the penalties or 2017 tax from the audit was assessed at the end of 2018 there has been at least 240 days elapsed. For the 2018 tax assessment, it has also been at least 240 days.

      Your taxes should be dischargeable.
      Thanks Justbroke! I didn't think you could shed tax debt in a 7 the same way that you can in a chapter 13?

      Comment


        #4
        The only issue I see is possibly the extensions since you would have "filed" on the extension filing date, and not April 15th. Chapter 13s are special in that taxes are split into priority and general unsecured. You don't have to pay the "general unsecured" portion during the Chapter 13. However, if there's any disposable monthly income (DMI) in that Chapter 13, it will go to the "general unsecured" creditors which would include the IRS' unsecured portion.
        Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
        Status: (Auto) Discharged and Closed! 5/10
        Visit My BKForum Blog: justbroke's Blog

        I am not an attorney. Any advice provided is not legal advice.

        Comment


          #5
          Word of caution. When calculating the three years it begins when the return was legally due. If an extension was requested the return was not legally due until October of a particular year, not April.

          Ergo, and without anything other analysis,

          2016 became due on October 15, 2017. Three years takes it to October 16, 2020
          2017 became due on October 15, 2018. Three years takes it to October 16, 2021

          Please note that I have not checked to see if the 15th fell on a weekend. If it did, then the due date/3 year date moves to the next business day.

          Des.


          Comment


            #6
            This is excellent information! So in the case of an extension, it only matters when it is due not when it is actually filed. In that case, here is what would have to happen. And this would not include the cumulative interest on the unpaid taxes that we would not be able to get rid of from our 2018 taxes. However a Chapter 13 would stop additional interest from accruing for all years. Below is my spreadsheet realizing the savings by waiting:
            Fed Tax 2016 Assessed Income Tax 11,647.23 Due 10/15/17, Filed 09/09/17, Assessed 12/3/18
            Fed Tax 2016 Accrued Failure to Pay Penalty 510.10 Due 10/15/17, Filed 09/09/17, Assessed 12/3/18
            Fed Tax 2016 Accrued Interest 840.42 Due 10/15/17, Filed 09/09/17, Assessed 12/3/18
            Fed Tax 2017 Assessed Income Tax 6,171.91 Due 10/17/18, Filed 11/14/18, Assessed 12/3/18
            Fed Tax 2017 Accrued Failure to Pay Penalty 354.37 Due 10/17/18, Filed 11/14/18, Assessed 12/3/18
            Fed Tax 2017 Accrued Interest 380.71 Due 10/17/18, Filed 11/14/18, Assessed 12/3/18
            TOTAL OWED 19,904.74
            TOTAL PAID TO DATE 3,575.00
            $325 pymt. x 11 mo. 6,500.00
            SUB TOTAL OF PAYMENTS 10,075.00
            9,829.74 POTENTIAL SAVINGS IF WE WAIT UNTIL OCT. 17, 2021



            Comment


              #7
              If I took this to the IRS, and showed them this and told them we planned to file bankruptcy and made them an offer, how likely do you think they would be to accept our offer? Do they even care to negotiate?

              The hardest part of all of this trying to figure out whether we should file together or separately. Right now, the IRS payments are arranged in his name. If he files, I will need to make new arrangements. That may be an advantage to him filing if the IRS then can only then look at my income to determine a new monthly payment amount. Not sure how this works. Since my husband also has no assets, the only thing his creditors can seek is a wage garnishment. His highest CC balance is 2500 and he has an unsecured loan for $7500. We have no money put aside for an attorney but I think a no asset Chapter 7 could be a DIY project if we find that it makes more sense for him to file now.

              So much to think about! Thanks for all of your help and more tips and suggestions are more than welcome!











              Comment

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