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If You Owe Both 2018 AND Earlier Income Taxes

Posted by Kevin on June 3, 2019 under Bankruptcy Blog | Comments are off for this article

Chapter 13 “adjustment of debts” case enables you to include 2018 income taxes into your Chapter 13 payment plan. That would:

    1. Save you money on payment of your 2018 tax;
    2. Give you financial flexibility;
    3. Stop any present and future tax collections and the recording and enforcement of a tax lien on the 2018 tax.

So Chapter 13 is a helpful tool for dealing with taxes you owe for the 2018 tax year. Sometimes it’s even absolutely indispensable—it solves a debt dilemma that appeared otherwise insolvable.

When You Also Owe Income Taxes for Earlier Years

However, Chapter 13 is a particularly powerful tool if you owe not just for 2018 but for other tax years (or year) as well. This is true wherever you stand with the earlier tax debt, whether:

    1. the IRS/state is now aggressively collecting the taxes;
    2. you are currently paying them through an agreed monthly payment plan;
    3. you haven’t yet filed the tax returns for the prior years.

1. Dealing with Aggressive Collection of Earlier Tax Debt

The minute your bankruptcy lawyer files the Chapter 13 case for you all the aggressive tax collection actions will stop. That is the power of bankruptcy’s “automatic stay.” You will have 3 to 5 years to deal with ALL of your debts through a payment plan. This includes all your income taxes. The Chapter 13 payment plan will be based on what you can genuinely afford to pay. You may well not need to pay some of your earlier taxes. You will likely not need to pay any more accruing interest and penalties on ANY of the income taxes. You will not need to worry about tax collections throughout the time you’re in the case—including the recording of tax liens. At the completion of your case you will owe no income taxes.

2. In a Monthly Payment Plan

Are you already in a payment plan with the IRS/state for the prior tax debt?

In most cases, installment plans push you to your financial limits.  The end result is that you probably did not withhold enough to pay your current year taxes.  That digs you into a deeper hole and the IRS could care less.

Furthermore, you know that you’ll violate your installment agreement if you don’t stay current in future income taxes. As stated in IRS Form 9465, the Installment Agreement Request form, “you agree to meet all your future tax obligations.”

Chapter 13 avoids this trouble. As mentioned above, the “automatic stay” immediately protects you from the IRS/state. Your monthly installment plan is cancelled right away. You make no further payments on it once you file you file your Chapter 13 case. All your prior income taxes AND your 2018 one(s) are handled through your Chapter 13 payment plan. You get the financial advantages and the peace-of-mind referenced in the above section. When you successfully complete your Chapter 13 case you’ll be totally free of any tax debt.

3. Not Filing Tax Returns

You may be in the scary situation that you can’t pay your taxes so you don’t file your tax returns.

Or you may be in an installment payment plan and you don’t want to violate it by admitting you owe more for 2018. You know you’ll be in violation of it upon filing the 2018 tax return, so you simply don’t do so.

But you know that not filing your 2018 tax return (and any prior unfiled ones) only delays the inevitable. You’re in a vicious cycle in which you may well be falling further behind instead of getting ahead.

Chapter 13 can likely enable you to break out of that cycle. The vicious cycle is broken because your Chapter 13 budget will also address your 2019 and future income tax situation. It does so because your new budget will include enough withholding or quarterly estimated payments so you can stay current for 2019 and thereafter. Again, you should end the Chapter 13 plan being completely tax-debt free.