Tax Debt Resolution

~ We help clients in phoenix, mesa and gilbert settle IRS tax debt ~

How does bankruptcy help Resolve Tax Debt?

Debt issues with the IRS or the Arizona Department of Revenue are a very scary and stressful time in someone’s life.  Tax debt comes from a variety of situations in life: failure to file on time, changing withholdings during lean financial times, improper tax filings that were amended and yielded higher obligations, running a business and not paying timely taxes or not paying enough, withdrawing from retirement, negotiating debt and not being prepared for the taxes that come with it and so on.

Most folks assume that when you owe taxes to the IRS or your state department of revenue, that the only option is to get on a payment plan.  They also assume that income taxes are never dischargeable in a bankruptcy.  Maybe you can hire a tax debt negotiation company.  And sadly, some just assume that they cannot afford to do anything and will just sit and wait for the consequences.  These options are not the only options.

If you live in Phoenix or Gilbert, Arizona and are looking for relief from income tax debt contact D.M Bankruptcy Law Group, LLC right away. We’ll talk about available bankruptcy options that can resolve your tax debt.

~ Common Questions on Income Tax Debt and Chapter 7 or Chapter 13 Bankruptcy ~

Tax Problems & Tax Debt Resolution Options

How can a Chapter 7 help you with your tax debt?

Income tax debt owed to the state or IRS can be discharged (meaning you do not owe it anymore) in a Chapter 7 as long as certain conditions exist.  Those conditions are:

  1. The year for which you owe taxes is at least 3 years old at the time of the filing of the Chapter 7 bankruptcy.  Talk to an attorney at D.M. Bankruptcy Law Group, LLC to learn the nuances of how to figure out the age of a tax debt.


  2. The tax return for the year you are trying to discharge must have been filed at least 2 years prior to the filing of the Chapter 7 bankruptcy.  It is important to talk an attorney at D.M. Bankruptcy Law Group, LLC to learn how you measure that time period.  For example, whether you got an extension to file your tax return can influence the measurement of this time period.


  3. The tax you owe must have been assessed at least 240 days prior to the filing of the bankruptcy or not assessed at all.

There are other nuances to consider such as whether a lien has been filed in the county in which you live or another county, whether the IRS or state file a tax return for you and many others.  Be sure to consult a bankruptcy attorney who has filed hundreds of cases dealing with taxes and other debts before deciding what you are going to do about your past tax debt.

How can a Chapter 13 help you with your tax debt?

A Chapter 13 bankruptcy is an excellent way to address tax debt. We help clients daily, in our Gilbert bankruptcy office, determine if filing a Chapter 13 bankruptcy is best method for a tax debt resolution.

First, it is important to understand that the rules for discharging taxes in Chapter 7 still apply in a Chapter 13.  But what about the taxes that do not fall into the 3/2/240 rules stated above?  Consider the following:

  • Chapter 13 can help you pay over time, usually 5 years, but sometimes as short as 3 years, taxes that you owe that cannot be discharged.  In fact, the bankruptcy court will allow you to prioritize these taxes over other unsecured debt, such as medical bills, credit cards, repossessions, and evictions.


  • Chapter 13 can help you if you have a lien recorded in your county by treating the tax as a secured debt (which it is) and paying it down over that 5-year period

Can I file Chapter 7 or Chapter 13 bankruptcy if I have not filed my tax returns?

The short answer is yes, you can.  But this is not advisable.  An individual who has not filed tax returns for years they should have filed tax returns and files bankruptcy, either Chapter 7 or Chapter 13, is at a real risk of having that bankruptcy dismissed.  When possible, the tax returns should be filed PRIOR to the filing of the bankruptcy.  If that is not possible, it is probable that those tax returns need to be filed within 2 weeks to avoid attempts by the IRS or the state department of revenue to dismiss your bankruptcy. 

You should consult with an attorney at the D.M. Bankruptcy Law Group, LLC to plan the best way to file your bankruptcy.  Timing is everything in bankruptcy.

What happens to my tax refunds in a bankruptcy?

Losing your tax refund in a bankruptcy is often a sore surprise for many people.  Especially in Arizona, many people lose some or part of the tax refund they receive after the filing of the bankruptcy. 

This is how tax refunds are treated in a Chapter 7 bankruptcy filing:

  1. The law considers the tax refund you receive after you filed bankruptcy an asset because some proportion of it was owed to you when you filed bankruptcy.  For example, if you filed your bankruptcy on 7/1/2020 (which is essentially half the year), and in March of 2021 you received $2,000 tax refund for the tax year of 2020.  Under Arizona exemption laws, you would owe 50% of your tax refund to your bankruptcy estate for the benefit of your creditors.


  2. But consider this example-If you filed Chapter 7 bankruptcy on January 1, 2021 and received a $2000 tax refund in March of 2021 for the tax year of 2020, you would have to turn the entire tax refund over for the benefit of your creditors.


  3. The best approach, when possible, is to wait to file bankruptcy until just after receiving your tax refund.  A small portion of the following year could be owed to your bankruptcy estate, but it will be minimal.  Most importantly, you can use your tax refund to pay your bankruptcy attorney fees.


    • Do not ask to receive your tax refund on a pre-paid credit card and think that will protect it.  It won’t.

    • Do not have your accountant forward your tax refund to “next year’s taxes” thinking that will protect your refund.  It won’t.

    • Do not take your tax refund out as a cash prior to your bankruptcy and stow it away and think that will protect it.  It won’t. 

This is how tax refunds are treated in a Chapter 13 filing:

  1. For the first year after you file your Chapter 13 bankruptcy filing, the treatment of your tax refund is very similar to a Chapter 7 bankruptcy filing.  You will likely lose that first refund. 

  2. Tax refunds after the first year may have to be turned over as well.  This all depends on your income and the amount of your plan payments.

Income Tax Debt Resolution is just a Phone call away.

Whether taxes are dischargeable, how unfiled tax returns are treated, and what happens to your tax refund in a Chapter 7 bankruptcy or Chapter 13 bankruptcy, are all issues that can be reviewed and discussed in a FREE CONSULTATION with a bankruptcy attorney from the D.M. Bankruptcy Law Group, LLC.

We help clients from all financial backgrounds file bankruptcy to help their tax problems in Gilbert, Phoenix, Mesa, Queen Creek, and other surrounding Arizona cities. We’re here to help you get a fresh start!

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