Getting behind on taxes…
It is not uncommon for folks that have had past financial problems to also owe back taxes to the government. When we get into a bind financially, sometimes we can’t afford to pay the taxes when due. This comes up most often when someone is self-employed or an independent contractor. It also can arise when we have large one-time transactions like the sale of real estate or large withdrawals from IRAs or 401(k) accounts (possibly generating taxes and early withdrawal penalties). All of these situations can lead to a large tax bill at the end of the year that just can’t be paid.
The news is good….and not-so-good.
The good news is that sometimes taxes are dischargeable in bankruptcy, but it is tricky. It is important to note, however, that often taxes are not dischargeable in bankruptcy. The best thing to do would be to seek out a bankruptcy attorney to help you make this important determination. Moreover, a tax may be dischargeable under one chapter of the bankruptcy Code but not under another.
What to look for
Some of the most important factors that come into play are: 1) the age of the past-due taxes, 2) whether returns have been filed (and when), the source of the taxes (personal or business-related), and which government entity they are owed to. Additionally, you will want to understand how a tax bill is broken down into its pieces and parts. A tax bill will generally have the underlying past-due tax, and also several penalty components. Also, the bill will include interest on the past due amounts, which are continuing to grow as time goes by. Some of these components may be dischargeable and some may not be.
I also point out that you will want to analyze your entire financial position. If you only owe back taxes and are mostly caught up on all of your other bills, you may have other options rather than opting for bankruptcy. The key is to talk to an attorney that can advise you on what those options might be.
