I short sold rental property, thinking I was doing the right thing, I owe the money and wanted the lender to be paid on the debt rather than just giving the property back. Now I have heard that I will have to pay income taxes on the amount I was forgiven in the sale. I already owe income taxes from 2002 and 2003. I have heard that a bankruptcy will eliminate my tax debts. Is this true?
Dear Blogger:
Bankruptcy may help eliminate or restructure your debt, depending on which Chapter you qualify for, however, only some taxes can be eliminated in bankruptcy. You may hear radio commercials offering the hope of eliminating tax debts in bankruptcy. But it's not as simple as it sounds. Most tax debts can't be wiped out in bankruptcy – you'll continue to owe them at the end of a Chapter 7 bankruptcy case, or you'll have to repay them in full in a Chapter 13 bankruptcy repayment plan.
If all of the following conditions are true and you qualify to file a Chapter 13 bankruptcy your tax debts will be paid at the same rate as your credit card debts through your Chapter 13 plan and after the successful completion of your plan, your tax debt will be eliminated; if all of the following conditions are true and you qualify to file a Chapter 7 bankruptcy your tax debts will be eliminated:
* The taxes are income taxes - payroll taxes or fraud penalties, can never be eliminated in bankruptcy.
* You did not commit fraud or willful evasion – you commit fraud when you file a fraudulent tax return or willfully attempt to evade paying taxes, one example is using a false Social Security number on your tax return. Bankruptcy can't help.
* The debt is at least three years old. - Your tax return must have been originally due at least three years before you file for bankruptcy. Did you file an extension to file your tax returns? Then you must calculate the three years from the extension due date.
* You filed a tax return. You must have filed a tax return, for the year of the tax debt you want to eliminate, at least two years before filing for bankruptcy.
* You pass the "240-day rule." The income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet.
* All of these time limits may be extended by an “offer in compromise” or a previous bankruptcy.
One more thing – did the IRS record a tax lien in the county where you live in within the last 10 years?
Do you want the good news or the bad news first? Well, so we can end this blog on a positive note I will give you the bad news first. If the IRS recorded a tax lien in the county you live or own property within the last 10 years, you’ll have to pay off the tax lien in order to sell the property. The good news is that as long as the tax debt passes the 3 year, 2 year and 240 day rule your bankruptcy will eliminate your personal obligation to pay the debt which prevents the IRS from going after your bank account or wages.
The rest of the good news is that if you must pay your income taxes because they do not qualify for forgiveness under the 3 year, 2 year and 240 day rule; and you qualify for a Chapter 13, you know exactly how much you must pay off during your bankruptcy because the amount of the debt is frozen on the date you file your bankruptcy. As long as you successfully complete your Chapter 13 plan, you are free from that tax debt.
Each bankruptcy is an individual case. Your circumstances may be similar to others filing for bankruptcy, however, the totality of your circumstances make your case different from anyone else’s. Depending on the amount of taxes you owe, and the rest of your circumstances, a Chapter 13 bankruptcy may be your light at the end of the tunnel, a great alternative allowing you to pay your tax debt and get on with your life.
