November 24, 2017

Liability for Unpaid Taxes: Five Remedies, Including Bankruptcy

Often, new client calls to my office are prompted by the unpleasant discovery that a tax authority wiped out their bank accounts to pay back taxes. Callers want to know if there is anything they can do to get their money back (generally, it’s gone for good) and if bankruptcy is an option for their larger financial troubles.

Five options for taxpayers who are unable to pay their taxes in full and on time

There are only five options for taxpayers who are unable to pay their taxes, in full, when owed:

  1. Get current.  Some choose to get current through whatever means necessary, including a bank loan or gift from family. The IRS accepts payment by credit card. So does the North Carolina Department of Revenue (NCDOR). Be aware, though, that credit card debt used to pay taxes may not be dischargeable in a bankruptcy case.
  2. Installment agreement and payment plan.  The IRS and the NCDOR both offer installment agreements in many circumstances.
  3. Bankruptcy.  I rely on a 600+ page book that analyzes the dischargeability of taxes in consumer bankruptcy cases, so please understand that this is a highly complex area of the law that cannot be adequately summarized for this website.  That being said:
    • Many people (and lawyers, for that matter) are not aware that income tax debt can, under certain circumstances, be discharged in full (no payments) in a Chapter 7 bankruptcy case.
    • In other circumstances, income taxes can be discharged in a Chapter 13 bankruptcy case, with the taxes paid in full over five years, but with interest and penalties paid over five years at a discount.
    • On the other hand, trust fund taxes are generally not dischargeable in a bankruptcy case. Trust fund taxes are taxes that are required to be collected or withheld from a third party, such as sales taxes and payroll taxes.
  1. Offer in compromise (OIC). This is an option for both federal and North Carolina tax liability.
    • A federal OIC is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayers tax liabilities for less than the full amount owed.  If the liabilities can be fully paid through an installment agreement or other means, the taxpayer will in most cases not be eligible for an OIC.
    • The North Carolina Secretary of Revenue has statutory authority to accept full settlement of a liability for a lesser amount that is due when, in his or her opinion, it is in the best interest of the state.
    • WARNING: Offers in compromise are a waste of time and money for most taxpayers, and this area is fraught with traps for the unwary. The IRS has specifically warned of advertisements and solicitations offering to settle tax debt for  pennies on the dollar.  Taxpayers should consult with a qualified and experienced advisor (such as a CPA, enrolled agent, tax attorney, or bankruptcy attorney) before going down this path.
  1. Collection, through tax liens, levies, sales, and garnishments.  Above all, remember that the IRS and the NCDOR are super-creditors. Unlike most creditors trying to collect from North Carolina debtors (see N.C.G.S. 1-362), the IRS and NCDOR can and do garnish wages and levy on taxpayer bank accounts. Many exemptions do not apply to tax collections; in other words, property that might be beyond the reach of North Carolina residents’ other creditors can be taken to pay IRS and NCDOR tax debt.

If you are behind in your tax obligations, do not rely on this post or any information found on the Internet as qualified legal advice for your particular circumstances; get legal advice from a good attorney who goes over your entire financial situation with you.

With the heavy hands granted tax authorities you should seek qualified legal counsel so that your rights and options are thoroughly explained for your circumstances.