Lawmakers in St. Paul may spend much of 2018 wrestling with a projected $188 million shortfall. While not a staggering sum, the state will surely look for new revenue sources before it trims services. So, expect the Department of Revenue to be even more aggressive than usual in collecting past-due income taxes. That’s especially true for older delinquent accounts which have not seen much activity lately.
These tactics are actually good news for Minnesota taxpayers looking to discharge their tax debts in bankruptcy. As set out below, the Bankruptcy Code sets out very specific rules in this area. Taxing authorities strictly adhere to these rules and almost never grant exceptions.
How Bankruptcy Stops Collection Activities in Minneapolis
In a payroll withholding environment, most W-2 employees never have to worry about delinquent income taxes. But thousands of Minnesotans are either self-employed or hold freelancing jobs on the side. Things like a brief business downturn, lack of knowledge about complex rules, or slow-paying clients often cause delinquency. When that happens, the Minnesota Department of Revenue usually tries to collect the debt by:
- Sending threatening letters,
- Filing income tax liens,
- Garnishing wages, and
- Levying bank accounts.
Most private moneylenders do not have these kinds of powers, but taxing authorities have broad authority under the law.
Bankruptcy’s automatic stay halts all these activities, and any other adverse actions. Section 362 of the Bankruptcy Code takes effect as soon as debtors file their voluntary petitions. Special rules apply to so-called serial filers (people who have filed bankruptcy more than once in the past year).
But in the vast majority of cases, the automatic stay not only takes effect immediately, but also remains in place as long as the case is pending. Moneylenders — even the Minnesota Department of Revenue — must get special permission from the judge to get around the stay. The Bankruptcy Code makes it very clear that the stay applies to state agencies. In delinquent tax cases, judges hardly ever grant special leeway.
Additionally, the automatic stay applies whether or not the underlying debt is dischargeable. So, even if the judge cannot forgive the Minnesota state tax debt, the Department of Revenue cannot try to collect it until after the bankruptcy case is over.
Rules Concerning Tax Debt Discharge
Tax debt is unsecured debt, just like credit cards and medical bills. However, many forms of government debt, including income taxes, are in a special category. To be discharged in a Chapter 7 or Chapter 13, the tax debt must meet the following requirements:
- Income Tax: The Bankruptcy Code does not define this term, and interpretations get a little tricky in areas like revenue-producing property. Arguably, such levies could be either income or property taxes.
- Three Years: The income tax must be at least three years old. This rule is more complex than it sounds. Personal income Tax Day is not always April 15, for people who commonly file extensions.
- Two Years: The returns must have been on file for at least two years prior to the petition’s filing date, as opposed to two years before the discharge date. Furthermore, the documents must be taxpayer returns. Substitute returns – returns filed on behalf of taxpayers by the taxing authorities do not count.
- 240 Days: Finally, the Bankruptcy Code states that the Department of Revenue or other taxing authorities cannot have “assessed” the debt within the 240 days prior to the petition date. In practical terms, that usually means the taxpayer has not received a notice in the last eight months.
Just as in other areas, bankruptcy forgives the legal obligation to repay the tax debt, but not the debt itself. So, if the Minnesota Department of Revenue has already filed a tax lien, that line remains in place. However, no one can try to collect the bill through letters, wage garnishment, or anything else.
Non-Bankruptcy Tax Relief Options in Minneapolis
Kain & Scott is a debt relief law firm as opposed to a bankruptcy law firm. There’s a big difference. Many Minnesota bankruptcy lawyers do little more than file paperwork. But we are committed to comprehensive debt relief. In addition to bankruptcy, we offer free credit repair and other post-bankruptcy services.
We also offer pre-bankruptcy assistance. Such help is especially useful with regard to income taxes, because some people do not meet the criteria outlined above. Some non-bankruptcy options include:
- Installment Agreements: Most taxpayers qualify for these arrangements. Most kinds of tax debt, other than alcohol taxes, also qualify. There is also considerable flexibility in terms of installment payment amount and other specifications.
- Offer in Compromise: The Minnesota Department of Revenue will accept less than the full amount if such an arrangement is in the state’s best interests. Some factors include the age of the debt (the collections limitation period is usually six years) and the taxpayer’s ability to pay.
Our lawyers can either help you in these areas or refer you to an attorney that can assist you.
Bankruptcy may be a way out for people with past-due Minnesota income taxes. For a free consultation with an experienced bankruptcy attorney in Minneapolis, contact Kain & Scott, P.A. for a free consultation. We’ve helped distressed debtors for over forty years.