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New Jersey Dischargeability of IRS and State Tax Liability

One of the many rules people constantly hear about bankruptcy is that IRS debt cannot be discharged in bankruptcy. Many people do not realize that bankruptcy does allow for the discharge of certain types of federal and state income tax liabilities. Our experienced bankruptcy attorneys at The Law Office of Andrew B. Finberg, LLC, have in depth knowledge of bankruptcy and tax laws and we use this knowledge to secure the most advantageous debt relief strategy for clients throughout New Jersey.

IRS Tax Liability ∙ Lawyers Working Diligently to Wipe Out Your Debt

Priority taxes must be repaid, whether through a Chapter 13 bankruptcy repayment plan, or other means. Our law firm understands the complex rules of what is or is not considered priority tax debt, and what components of your debt can be discharged:

  • Old income taxes: In general, income tax liabilities that are less than three years old cannot be eliminated through bankruptcy. However, tax obligations that are greater than three years old may be dischargeable, assuming certain conditions have been met. These conditions deal with the timing of the filing of tax returns, the date on which the taxing authorities agree on the amount of the tax due, and whether there have been any intervening events which resulted in the taxing authority holding off on collection efforts. These would include a negotiated repayment plan which might have been entered into, or the automatic stay which might have been imposed as a result of a prior bankruptcy filing.
  • Trust fund taxes: If you own a business and have employees for whom you should be withholding taxes, but fail to remit these withholdings to the taxing authority, then you will be held personally liable for these funds, plus interest and penalties. While the trust fund tax debt and interest from such are considered priority taxes and non-dischargeable,you may still be able to satisfy this obligation through a Chapter 13 plan, over a period of up to 60 months, without continuing accrual of interest or penalties.
  • Sales and use taxes: When you own a business and make sales which are subject to the collection of sales tax, you are personally liable for these taxes if you fail to deliver them to the taxing authority. Again, these taxes are non-dischargeable, but may be satisfied over a period of up to 60 months through a repayment plan under Chapter 13 , without continuing accrual of additional interest and penalties.

How Tax Debt Is Applied in Your Bankruptcy Petition

Chapter 7 Bankruptcy: Non-priority tax obligations, such as tax penalties and outdated tax obligations, may be discharged, along with other unsecured debt.

Chapter 13 Bankruptcy: All priority obligations and non-priority obligations that were secured with a tax lien must be repaid. However, non-priority tax obligations may be discharged. Debtors benefit in a Chapter 13 bankruptcy in that tax obligations are significantly reduced, you are allowed up to 60 months to repay these obligations, and additional penalties and, in many instances, interest as well, stop accruing while the obligations are being paid. As a result of a Chapter 13 filing, debtors are therefore able to eliminate tax debt in a manner in which they can afford. If a repayment plan is negotiated directly with the IRS, interest and penalties may still continue to accrue — in bankruptcy, they do not.

Be Weary of the Tax Implications of Other Debt Relief Solutions

Debtors are frequently unaware of the tax implication of agreeing to a short sale for real estate, or deed in lieu of foreclosure, debt reductions settlements directly with creditors, and the elimination of debt as a result creditor write off. In many of these instances, the elimination or forgiveness of debt will be considered a taxable event and income tax liability will result.

When debt is reduced by a creditor after a negotiated settlement, or written off entirely as a bad debt, the creditor may seek to take a tax deduction for the amount of debt left unpaid. In that event, it will issue the IRS a form 1099, which indicates the amount of debt that was forgiven or excused. When this happens, the IRS will assume you received income in the amount of the excused debt and you will be required to report that as income on your tax return. This tax liability is totally avoided, however when a bankruptcy is filed and the underlying debt is discharged.

Marlton State Tax Liability Attorneys ∙ Federal Tax Liability Attorneys

Talk with our experienced bankruptcy lawyers at the Law Office of Andrew B. Finberg, LLC. We can help you understand your rights and options, and help you move efficiently into a life after debt. We offer flexible meeting schedules and affordable payment plans. Call (856) 988-9055 or contact us online to schedule your free initial consultation.

the Law Office of Andrew B. Finberg, LLC is located in Marlton, New Jersey and provides skilled legal counsel to individuals needing help with bankruptcy in Cherry Hill, Voorhees, Mount Laurel, Morristown, Maple Shade and serves Burlington, Camden and Gloucester Counties.

the Law Office of Andrew B. Finberg, LLC is located in Marlton, New Jersey and provides skilled legal counsel to individuals needing help with bankruptcy in Cherry Hill, Voorhees, Mount Laurel, Morristown, Maple Shade and serves Burlington, Camden and Gloucester Counties.

We are proud to be a federally designated debt relief agency.
We help people file for bankruptcy relief under the Bankruptcy Code.

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