Adam Mack, J.D.
Hillary Stirling, research assistant
Taxes or other governmental debts are probably the second most-common priority debts individuals have to deal with, after domestic support obligations. The law governing this type of debt, found in 11 USC 507(a)(8), is also one of the more complex for priority debts. It divides out the taxes and other governmental debts into the following categories: income, property, other, employment, and excise taxes, customs duties, and penalties.
Debts under this category arise due to taxes on income or gross receipts. Timing is everything with this particular debt, though. Only those income tax debts incurred within the last three years if a return was not filed (or in the last two years, if a return was filed) are considered priority. Of course there are always exceptions to the general rule; for a more thorough explanation on when taxes are dischargable, see my article entitled Income Taxes and Bankruptcy. Income tax debts from years that are distant enough to be dischargeable are simply considered unsecured. If an assessment from audit adjustments or amended returns are made, then only those made within the last 240 days prior to the petition being filed need to listed as priority on the bankruptcy petition.
This one is much more straight forward. Property taxes that were due during the year prior to filing bankruptcy are considered priority debts. If the tax was assessed in prior years, then it is simply considered an unsecured debt.
If the person filing bankruptcy owns a business and is required to collect taxes (like sales tax or withholding tax), then that tax liability is also considered priority.
If the person filing bankruptcy owns a business and is required to pay employment taxes on a “wage, salary, or commission,” then those taxes for the last three years are also considered a priority debt.
Just like with employment taxes, any excise taxes that you owe for the last three years are considered a priority debt.
Like with income tax, customs duties are only considered priority debts if they were incurred under certain circumstances. If the merchandise that give rise to the customs duty was consumed within one year before the day of the filing the petition, or was liquidated or reliquidated within one year before the filing the petition, then it is considered priority. A customs duty can also be considered priority for up to four years if it is been subject to certain investigations. (This is uncommon.)
Any penalties relating to any of the above taxes or governmental debts are also considered priority debts.
It should be noted that if you appeal a tax or other governmental debt, that pauses the time frame. So suppose you plan on filing bankruptcy, and you have a large income tax debt that is three years and one month old; however, you appealed the debt and it took six months for the courts to confirm that you still owe it. That income tax debt would still be considered a priority debt for another five months.
The Most Important Part
Taxes and governmental debts are some of the heaviest burdens individual debtors have to carry. If you’re struggling with such a debt, you deserve the assistance of a qualified Kansas bankruptcy attorney. Call us today – we can review your individual circumstance and let you know what your options are.
These articles are for general informational use and do not constitute legal advice. Since laws change over time, it’s possible some articles are out of date and for that reason, we make no representation that the articles are fully accurate. For actual, up-to-date legal advice (including a free consultation), please contact us!