Tax Litigation in Bankruptcy Court
When you or your business is facing tax liabilities that you cannot afford, bankruptcy may offer a solution to allow you to litigate, or resolve, your tax issues. It can also be an effective tool when you are facing a tax assessment that you dispute but do not have the money to prepay the tax before filing your formal dispute.
The IRS and state taxing authorities have broad, far-reaching powers to recover taxes they believe are owed. But bankruptcy can provide you with protection from the government’s reach while giving you a taxpayer-friendly method for litigating or resolving your tax issues.
If you have questions about tax debt and litigation in bankruptcy, the North Carolina bankruptcy lawyers of Sasser Law Firm want to help you. Our attorneys have the experience and knowledge needed to handle the highly complicated issues that arise in tax litigation in bankruptcy. Our firm has three board-certified bankruptcy specialist attorneys on staff to make sure that your case is properly and efficiently handled.
Why You Should Use Our Bankruptcy Attorneys for Your Tax-Related Bankruptcy Issues
At Sasser Law Firm, we have extensive experience handling bankruptcy matters, having helped more than 8,500 individuals and businesses resolve their bankruptcy claims. We can help you with all types of bankruptcy cases, including Chapter 7, Chapter 11, and Chapter 13.
Our attorneys can help you particularly if you are facing an emergency financial situation, like foreclosure, car repossession, or an unexpected tax bill. Our firm will fight tirelessly for your rights and interests and seek the best possible outcome in your case. We are happy to take on the toughest bankruptcy cases and will advocate for our clients’ rights all the way through appeal, if necessary.
When you hire Sasser Law Firm for your case, you can be assured that you will work directly with one of our experienced bankruptcy attorneys. Our attorneys will work with you to find the best solution for your individual situation. There is never any pressure to go straight to filing for bankruptcy.
We offer clear, straightforward fee structures. We offer no-obligation consultations, and if you choose Chapter 13 bankruptcy, there is no fee owed until you file, and the costs and fees are included in monthly payments that are made over a period of time.
If you want to know more about whether bankruptcy might help you with your tax debt or in your tax litigation matters, contact the North Carolina bankruptcy attorneys of Sasser Law Firm by calling us or by filling out our website form to schedule a no-cost case evaluation to discuss your legal rights and options.
Bankruptcy Tax Litigation in NC
In the bankruptcy courts in North Carolina, taxpayers can resolve outstanding tax liabilities by filing for bankruptcy. Under a Chapter 7 bankruptcy, certain tax debts can be discharged without the taxpayer/debtor having to pay a cent on those tax debts.
Other tax debts may not be dischargeable, or the bankruptcy court may order certain assets of a debtor to be sold to cover the tax liabilities. In general, a Chapter 7 bankruptcy may require assets with substantial equity to be sold to pay off creditors, including the IRS or a state taxing authority. However, most often there are no assets liquidated in a Chapter 7 bankruptcy because the debtor does not own assets having a substantial amount of equity.
In addition, bankruptcy can be used to litigate tax disputes without having to pay the taxes upfront. Even though a taxpayer has the right to contest an assessed tax liability, tax laws require the taxpayer to pay the assessment. If the taxpayer prevails in his or her dispute, the IRS or state taxing authority will then issue a refund.
Of course, the taxpayer is still deprived of his or her money for the weeks, months, or years that it takes to resolve a tax dispute. When you file for bankruptcy and dispute whether an assessed tax liability has been correctly calculated or is actually owed, the bankruptcy court may have the jurisdiction to make that determination without requiring you to pay the disputed tax liability upfront.
Tax Liability Disputes in Bankruptcy
Generally speaking, bankruptcy courts have jurisdiction to determine the amount or legality of any state or federal tax, or any fine or penalty arising from a tax, or any addition to a tax, regardless of whether the tax liability has been assessed or paid, and whether the tax has previously been contested.
Debtors who file for Chapter 7, Chapter 11, or Chapter 13 bankruptcy may dispute a state or federal tax issue, including:
- The amount or validity of a deficiency claim
- The validity of a tax lien
- Whether a tax debt will be discharged
If warranted, bankruptcy courts have the authority to order the IRS or a state taxing authority to issue a refund. Bankruptcy courts can also shield taxpayers from having to prepay proposed tax liabilities until the issue can be determined by the court or resolved.
United States Bankruptcy Court
In the United States, bankruptcy petitions are filed in federal bankruptcy courts. Federal bankruptcy courts are considered divisions of the district court (for example, the U.S. Bankruptcy Court for the Eastern District of North Carolina). Bankruptcy judges preside over the bankruptcy courts and they solely hear cases in the bankruptcy court. The district courts have original and exclusive jurisdiction under federal law for all cases filed under the U.S. Bankruptcy Code. The district courts grant bankruptcy courts the authority to hear and adjudicate bankruptcy cases and certain matters related to bankruptcy cases.
Litigation in bankruptcy courts operates much in the same way as a regular case in federal district court, with opportunities for discovery, presenting evidence, and cross-examining witnesses. However, the bankruptcy court hears the evidence and makes factual findings and legal conclusions. It is extremely rare for bankruptcy courts to use juries as finders of fact, even when the bankruptcy court holds a trial.
Restrictions to Bankruptcy Court Jurisdiction
Bankruptcy courts have jurisdiction to determine the amount or validity of tax debt if the bankruptcy trustee or debtor proactively contests or objects to a tax claim in bankruptcy court. The remedies that a bankruptcy court can order in a tax dispute depend on which chapter of the Bankruptcy Code the debtor is proceeding under.
Moreover, a bankruptcy court’s ability to discharge income tax debts depends on the debtor having met several requirements beforehand:
- The tax became due at least three years before the debtor’s bankruptcy filing
- The debtor had filed a return at least two years before filing for bankruptcy
- The tax was assessed by the taxing authority at least 240 days prior to the filing of the bankruptcy petition.
- The debtor has not been accused of fraud by the IRS (unless the debtor can successfully defend against the accusation).
As a result, it is important for debtors to keep track of the dates when income tax returns were filed and taxes were assessed, as these dates will affect whether the bankruptcy court will have the authority to discharge the debtor’s income tax debts.
Although it is rare, pursuant to 28 U.S.C. § 1334, the statute that sets forth the bankruptcy court’s authority (under the jurisdiction of the district court), a bankruptcy court may decline, on its own review or on the motion of a party, to decline to hear a dispute involving state tax law, when such a dispute could be adjudicated in a timely manner in state court.
How Filing for Chapter 7 Bankruptcy Affects Your Tax Return
Tax Returns & Chapter 7 Bankruptcy
If you have filed for Chapter 7 bankruptcy, you may wonder whether and how your bankruptcy case will affect your taxes. In short, while your Chapter 7 bankruptcy is proceeding, you will continue to file your individual Form 1040 or 1040-SR tax returns like normal. In a few cases, the bankruptcy trustee appointed in your Chapter 7 case will file a Form 1041 tax return for the bankruptcy estate.
Tax Returns & Chapter 13 Bankruptcy
If you have filed for Chapter 13 bankruptcy, you can enjoy protection from the collection activities of taxing authorities while proposing a monthly payment plan to address the tax debt that cannot be discharged in bankruptcy. Chapter 13 bankruptcy often provides the dual benefits of relief from particular older tax debt and penalties coupled with manageable monthly payments toward the tax debt an individual must pay still. Chapter 13 bankruptcy also creates an ideal forum for individual debtors in which to litigate tax issues or resolve tax disputes.
An individual debtor filing for Chapter 7 (or Chapter 11) bankruptcy also has the option of closing the tax year on the day before filing his or her bankruptcy petition. This has the effect of dividing the debtor’s tax year into two shorter tax years of less than 12 months each. If the debtor chooses this route, his or her federal income tax liability for the tax year prior to filing the bankruptcy petition becomes an allowable claim against the bankruptcy estate and is not dischargeable. If the debtor chooses not to split up his or her income tax year, no tax liability for the tax year in which a bankruptcy petition is filed can be collected from the bankruptcy estate.
This election to end the tax year early is rare but might be an option to consider when a debtor has assets that will be liquidated in Chapter 7 and knows that there is an income tax liability that will need to be paid for the current tax year.
Talk to a Bankruptcy Attorney
If you or your business has tax liabilities you cannot afford, or if you have outstanding tax liabilities or other tax debt issues, you need to speak with an experienced bankruptcy attorney.
Bankruptcy law and tax law are both complex matters. When they combine, they can create an even more complex situation for a debtor. If you find yourself dealing with tax debt and/or tax litigation while considering bankruptcy, you need knowledgeable legal representation and advice to help you properly and effectively resolve your tax and bankruptcy issues.
Contact the North Carolina bankruptcy attorneys at Sasser Law Firm today to schedule a free consultation to discuss your tax and bankruptcy issues and to learn more about your legal rights and options.