We have a long and unpleasant relationship with taxes in this country. We literally fought the most powerful country on earth over a few pennies tax on some tea and paper. In life though, there are two certainties. You will die and you will definitely pay taxes. The longer you wait to handle this reality, the longer you wait to get relief. Unfiled taxes are a life sentence.
Tax debt can be overwhelming and unfiled taxes just make it worse. This is especially true if you happen to have something go wrong with your job or your business. People hold off filing their taxes for a number of reasons and at the time, many of them seem to make perfect sense. There is a problem with that though and it can be very costly.
Bankruptcy can discharge many kinds of old tax debt. It’s one of the best tools you can use to combat the IRS and their seemingly unlimited desire to squeeze every penny out of you that they can. But there’s a catch. You have to file your tax returns.
Unfiled tax returns turn your ability to discharge those old debts upside down. Below, I’ll outline two different scenarios that I’ve dealt with in the last month.
Filed, On time tax returns
My first client came to see me. He owed $91,500 to the IRS in back taxes. He certainly didn’t have that kind of money and he was stuck between a rock and a hard place. But, he had filed his return on time, complete and accurate.
The second client had a different situation. She owed $65,000. She also didn’t have the means to pay that, but she was in way more trouble than my first client. She had unfiled taxes dating back nearly a decade.
The first client I can help…today. The second client is going to have to keep treading water for two more years before I can help her.
You’d think that the second client would be better off, but you’d be wrong. The golden rule in bankruptcy when it comes to taxes is… you can’t discharge tax debts that you haven’t filed a return on.
Bankruptcy eliminates some taxes
You can discharge most taxes in bankruptcy. While taxes are a big deal, if you handled your obligations correctly, your old taxes can be eliminated in bankruptcy. You just have to file your return and let the clock start ticking.
Even if you can’t file bankruptcy on your taxes, there is a statute of limitations on collecting taxes, but that doesn’t start until you actually file the return.
The 2 year rule
In order to qualify for the two year rule you’ve got to adhere to the policy. To get a tax discharged, the return must be on file with the IRS for at least 2 years before the bankruptcy case is filed. Extensions move the starting point, so avoid them if you can. Here’s an example:
- If you get an extension until July 15th, that’s your start date. Even if you ultimately file your taxes on April 21st.
- If you don’t get an extension and you file on June 1st, you start counting the day you filed, June 1st.
Always be aware of filing dates that fall on weekends or holidays. April 15th is typically the “last day to file without penalty” but that can change from time to time.
My client who hasn’t filed in a decade is in a precarious situation. She is looking at retiring in the next 5 years. Very few creditors can get their hands on Social Security benefits. The IRS can.
We have to get the clock ticking on discharging those taxes. It’s going to take a lot of leg work on the part of this client. They’ll have to find W-2s and other income reports. They’ll likely even have to contact the IRS for a list of reported income that they have. However, they’ll be able to file a return.
This will get the ball rolling, but it would have been better to do things the right way from the start. This person would be gliding into the last few years of working, footloose and fancy free. Instead, they’re like David, trying to hold off the biggest Goliath of them all, the IRS.
Unfiled taxes can ruin your life. If you’ve gotten yourself into a situation that you can’t seem to get out of without help, call us. Let our attorneys take a look at your situation to see how we can help. Our consultations are always free. You literally have nothing to lose.