Taxes

The most common type of tax that people owe are income taxes due to the Internal Revenue Service (“IRS”) and to their State Department of Taxation.

Priority claims, which include some tax obligations, must be paid 100%, whereas general unsecured claims can be paid anywhere from 0 to 100% depending on the circumstances.

Thus, the first thing to determine is whether the particular taxes in question are priority debts, or general unsecured debts. Moreover, if the taxing agency has already obtained a lien against your property, then they are SECURED by the value of whatever their lien attaches to as of the date your bankruptcy case is filed. The secured portion of the debt must be paid 100% plus interest.

A tax debt is priority if it is owed for a tax year for which a return was due to be filed within the 3 years prior to the bankruptcy case being filed. This period usually runs from April 15 of the year following the tax year in question. For example, if you owe taxes for 2003, and you file your bankruptcy case on May 30, 2006, these taxes are priority taxes because they were last due to be filed on April 15, 2004 and that is within 3 years of May 30, 2006. Extensions to file will change that time frame (usually to October 15 of that year).

A tax debt is also priority if it is assessed within 240 days prior to filing the bankruptcy case. This time period may be extended if an offer in compromise has been filed, or a prior bankruptcy case has been filed during that 240 day period.

The issue of how much of an unsecured tax (tax filed over 3 years ago) can be discharged also depends on which Chapter of bankruptcy one files. This is because in a Chapter 13 case, usually some percentage (between zero and one hundred) is repaid to general unsecured creditors, whereas in a Chapter 7 case, nothing is paid by the debtor to unsecured creditors.

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