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Write Off More Income Taxes through Pre-Bankruptcy Planning

With these 5 steps, you can discharge (legally and permanently write off) more of the income taxes you now owe.

Your Goal

Use the bankruptcy rules to take appropriate action before you file bankruptcy. Then when you do file you can discharge more taxes, which otherwise you would have had to pay.

The 5 Steps

1. WAIT out the appropriate lengths of time before filing your bankruptcy case.

Most income tax debts can be discharged after specific periods of time. Much pre-bankruptcy tax strategy turns on determining with your bankruptcy lawyer exactly when each of your tax debts would become dischargeable, and then trying to wait to file bankruptcy until then. Sometimes, because of pressure either from other creditors or from the tax authority, you can’t wait that long. But with the active guidance of your lawyer you will discharge the maximum amount of taxes possible under your circumstances.

2. FILE past-due returns as soon as possible to start the clock running on those.

If you know you owe income taxes and don’t have the money to pay, don’t avoid filing the tax return. Your inclination to not file tax returns as long as possible is understandable But you cannot discharge a tax debt until two years after its tax return has been filed (among other conditions). So file the old tax return(s). And get the advice you need about buying time during those two years to protect yourself and your assets.

3. STAY in compliance as much as possible going forward by paying your current taxes.

As much as possible act appropriately regarding current-year income taxes as you wait to file your bankruptcy case. Have the appropriate amounts withdrawn from your current paychecks. Pay the appropriate estimated quarterly taxes if you are self-employed. Make sure your tax payments don’t go to the older taxes that you are planning on discharging and not paying. Do this by clearly instructing the IRS/state that your tax payments are for the current tax year. Staying current on present taxes is also usually required to prevent the IRS/state from taking aggressive action against you. So staying on top of your current taxes usually allows you to wait longer and discharge more taxes.

4. AVOID tax fraud and evasion, and, whenever possible, “trust fund” taxes.

You can’t ever discharge income taxes associated with fraud, fraudulent tax returns, or tax evasion. That’s true no matter how long you wait to file bankruptcy. So you have to completely avoid any of these behaviors. Talk to a knowledgeable tax accountant or lawyer about what these mean in your situation.

“Trust fund” taxes are those that an employer withholds from an employee’s paycheck and then sends to the IRS/state. That money is considered to not belong to the employer but rather to be held “in trust” for the IRS/state. If not sent to the IRS/state but used for other purposes, these amounts owed can never be discharged in bankruptcy. So if you are responsible for any such “trust fund” taxes, try do what you can to pay them when due so you don’t owe any when you file your bankruptcy. That may mean prioritizing your scarce resources to keep these current. Otherwise they will not be discharged in your Chapter 7 case. Or they will have to be paid in full as a “priority debt” in a Chapter 13 case.

5. BE AWARE of tax liens.

Tax debts secured by tax liens have to be paid in full in Chapter 13, with interest. These debts often survive a Chapter 7 discharge. So try to avoid having the taxing authority record a tax lien against you. Admittedly, you may not have much control over this, but you may more than you think. Talk with your lawyer or tax accountant about what you may be able to do to avoid a tax lien.

Careful!

Using pre-bankruptcy planning to discharge more of your tax debts is one of the more sophisticated strategies that lawyers undertake with their clients. Do NOT attempt these strategies—including the five steps outlined here—by yourself. You do truly need the active counsel of a highly experienced bankruptcy lawyer. What is written here should be the beginning of the personal discussion you need to have with your lawyer.