It’s tax season and tax myths are everywhere. Know what the most dangerous one is?
If you can’t pay the tax on the return, you’ll escape collection action if you keep a low profile by not filing the return.
I hear it repeatedly, each year, year after year. And it’s wrong, over and over.
Four counts of wrong
First, I’ve seen no evidence that the IRS leaps immediately to chase taxpayers whose filed return shows an unpaid liability. In fact there’s a right to an installment agreement if your unpaid tax is $5,000 or less.
Second, failing to file the return on time triggers a tax penalty separate from the penalty for not paying on time. There are two penalties in play here: a penalty for not filing and a different penalty for not paying.
Third, duck the requirement to file, and somehow you’ve given yourself permission to keep putting it off. And of course, now that you are late, you have penalties added to the liability and the interest clock is ticking.
But most importantly to a bankruptcy lawyer is that you cannot ever discharge the tax debt in bankruptcy if the return is not filed.
Discharging tax in bankruptcy
Bankruptcy law sorts tax debts into three piles:
- taxes secured by a lien
- taxes that survive a bankruptcy
- taxes dischargeable without payment
If you’ve got tax troubles, you obviously want your obligations to fall in that third pile, the dischargeable taxes. Care to guess what the factor that determines dischargeability? The length of time the return has been on file.
The rule, simplified a bit, is: taxes are dischargeable in bankruptcy if they relate to a tax year whose return was due more than three years before bankruptcy; for which the return, if not filed on time, has been on file for two years; and the taxes for that year were assessed more than 240 days before filing.
So, you can’t begin to consider wiping out tax debt if you don’t file the return and that return needs a certain degree of aging before discharge is possible.
Bankruptcy is not the first choice of ways to resolve tax troubles, but bankruptcy can eliminate tax debt if it comes to that.
But not if you follow the myth that you don’t file the return until you can pay the tax.
Image courtesy of wikimedia.org
