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Resolving Tax Liabilities in a Chapter 13 Bankruptcy

By Ullian Associates of The Law Firm of Ullian & Associates, P.C. on October 16, 2019

A Chapter 13 bankruptcy can be useful in dealing with the Internal Revenue Service and the Massachusetts Department of Revenue.  Many problems arise because of unpaid taxes.  This nonpayment happens for many reasons: people working on commission and not setting aside enough money to pay their taxes; or people running a small restaurant and failing to pay the meals taxes to the state.  Two specific examples will help illustrate how problems with taxes can arise.

Example: Barbara runs a stationary store and has five employees.  The payroll each week is $3,000.00 from which she has deducted $700.00 for federal, state and social security taxes.  Business is bad so Barbara does not turn over the taxes withheld to the tax authorities, but uses this money to run the business.  Time passes, and soon it is ten weeks later and now $7,000.00 is owed to the government.  Barbara goes out of business.  She is still personally liable for this $7,000.00 in taxes.

Example: Jim is a realtor and paid as a 1099 independent contractor.  Jim estimated he would be paid $100,000.00 last year and planned to set aside $15,000.00 for taxes.  Unfortunately Jim was in a car accident on his way to Thanksgiving dinner and had to pay $10,000.00 in medical bills from the money he had set aside for taxes.  Jim is now $10,000.00 short on his payment to the IRS.

Once the tax authorities realize that you owe them money, their collection efforts can cause tremendous anxiety.  Everyone has heard horror stories of actions by the IRS and state tax authorities.  Even though these actions do not represent the norm, people are naturally worried about the possibility of having their bank accounts frozen or their paychecks garnished.  Also, people are concerned with the ongoing interest and penalties that are accruing on the owed taxes.  This can be a big problem since Barbara’s $7,000.00 debt for example will quickly become a larger debt if not dealt with promptly.

In many cases even though the individual has attempted to work out a repayment schedule (which we encourage), a resolution cannot be reached with the IRS or Massachusetts Department of Revenue.  The best way to handle the pressure and stop the collection efforts by the tax authorities may be to file for Chapter 13 and pay the taxes back over a period of time.

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