You might have heard that bankruptcy cannot help with taxes. Especially with business taxes. That’s often not true. Let’s clear up some of the myths about this.
Myth: Bankruptcy does not write off (legally “discharge”) taxes.
Truth: While it is true that SOME taxes can’t be discharged, many others CAN be. The law is complicated. Whether a particular tax can be discharged or not depends on many factors. So each specific tax debt needs to be carefully analyzed. But you should not just assume that your taxes can’t be discharged.
Myth: Business taxes in particular can’t be discharged.
Truth: Depends what you mean by “business taxes.”If you run a business as a sole proprietorship or a partnership, then the business would not separately pay income taxes—the income would flow through to you as personal income (after deducting the business expenses). This “business” income tax may be discharged just like any other personal income tax. Some of main factors include:
• whether you had filed the tax return for that particular tax year
• how long ago that tax return was filed
• when the tax was originally due
• whether you tried to get a tax compromise
• whether you tried to evade the taxes
If after applying all the factors some of your taxes are not dischargeable, a Chapter 13 case would give you three to five years to pay off those taxes, WHILE protecting you and your assets from the tax authorities. During this time, usually interest and penalties would stop accruing on the taxes. AND often you would be allowed to pay less (and sometimes nothing) to your other creditors, allowing your limited money to go to the taxes. Then when you finish your case and are out of the protection of the bankruptcy court, you would no longer owe any taxes, nor any other debts.
Myth: Bankruptcy especially does not help with employee withholding taxes, the “trust fund” taxes you were supposed to pay to the IRS after withholding them from your employee’s wages.
Truth: That’s right—none of the different chapters of bankruptcy will discharge this category of taxes. But bankruptcy can still help. A Chapter 13 case WILL give you years to pay off those trust fund taxes, WHILE keeping the tax authorities off your back, usually stopping the interest and penalties from accruing, AND often letting you pay less to your other creditors so that you can focus on paying off this one. These are HUGE advantages.