Many clients ask a bankruptcy attorney about eliminating tax debt in bankruptcy. This is a very legitimate question because, as most people understand it, bankruptcy is to help people to reorganize their life and get rid of debt that they are unable to pay. The reality is that eliminating tax debt is not quite as simple as it seems, even when filing a bankruptcy.
In order to ensure that any taxes are removed, clients will need to make sure that they discuss this with their attorney as they are signing the agreement. As it stands, most tax debt cannot be wiped out in a bankruptcy.
The type of bankruptcy matters
If a person ends up filing a Chapter 7 bankruptcy they will have to pay taxes at the end of the bankruptcy, and if a Chapter 13 bankruptcy is filed the taxes will need to be repaid through a Chapter 13 bankruptcy repayment plan.
The only real option to be able to discharge tax is through a Chapter 7 bankruptcy, but this only applies if the debts qualify for a discharge and the person is eligible for Chapter 7 bankruptcy.
Qualifying for tax discharge under Chapter 7 bankruptcy
In order to eliminate tax debt in bankruptcy, it is important to file a Chapter 7 bankruptcy, wherein there is a potential for wiping out, or discharging, federal income tax. In order to do this, however, very stringent conditions need to be met including the following:
- The taxes that are going to be discharged are income taxes. Other taxes such as payroll tax, or any fraud penalties cannot be eliminated through bankruptcy.
- The person filing bankruptcy can not have been accused of fraud or willful evasion. If a fraudulent tax return has been filed or the tax filer, in some other way made a real attempt to avoid paying taxes, then bankruptcy cannot help in this situation.
- Any tax debt eliminated through a Chapter 7 bankruptcy must be a minimum of 3 years old.
- There is a rule known as the 240-day rule. What this means is that the income tax debt, which the filer is seeking to discharge, must be assessed by the Internal Revenue Service at least 240 days before the filing of the bankruptcy petition. The only exception to this rule is that if the IRS has not yet assessed the taxes that have been filed.
- Finally, the person filing for a tax debt discharge under Chapter 7 bankruptcy must have filed a tax return for the debt that they wish to have discharged, and it must have been filed at least two years before filing for the bankruptcy.
Speak with a tax attorney
A bankruptcy attorney eliminating tax debts in a bankruptcy is a complicated issue. It is highly recommended that someone who is seeking to have the taxes discharged through bankruptcy schedule a consultation with an attorney in order to understand all the nuances of eliminating tax debt in bankruptcy.
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Note: This is for information purposes only and does not constitute legal advice