Discharging Past Due Taxes Through Bankruptcy

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There are many events that can force a person into bankruptcy. In many cases, it is a confluence of unexpected expenses that ultimately overwhelms a person’s savings and finances. Back taxes can be among these contributing factors. However, debtors with significant back tax debt should be aware that bankruptcy does not necessarily discharge all back taxes. 

The general rule is that taxes are not dischargeable in bankruptcy, but there are exceptions. Tax debt that meets very specific criteria may still qualify for a discharge in Chapter 7 bankruptcy

  • The past due taxes must be income taxes. 
  • The tax debt must be based on a tax return that was due to be filed at least three years prior to your bankruptcy. 
  • You must have actually filed the relevant tax return at least two years prior to filing for bankruptcy. 
  • The IRS must have assessed the taxes at least 240 days prior to your filing for bankruptcy. 
  • The tax debt cannot have been the product of fraud or intentional tax evasion. 

It is also important to note that even if the tax debt qualifies for discharge under these rules, bankruptcy does not release a federal tax lien that has already been recorded against your property. With all these exceptions, it seems clear that bankruptcy is often not the best method for discharging tax debt. Fortunately, there are other options for resolving past due taxes, including direct negotiation with the IRS and offers in compromise. A California law firm with experience in both bankruptcy and tax law can help you determine your best course of action if tax debt has created a financial problem for you. 

If you are overwhelmed by debt and considering bankruptcy, contact Certified Specialist in Bankruptcy Law, Max Gardner of The Law Offices of Young Wooldridge, LLP for a free consultation.     

- See more at: http://www.youngwooldridge.com/blog/discharging-past-due-taxes-through-bankruptcy/#sthash.naKBFdww.dpuf

There are many events that can force a person into bankruptcy. In many cases, it is a confluence of unexpected expenses that ultimately overwhelms a person’s savings and finances. Back taxes can be among these contributing factors. However, debtors with significant back tax debt should be aware that bankruptcy does not necessarily discharge all back taxes. 

The general rule is that taxes are not dischargeable in bankruptcy, but there are exceptions. Tax debt that meets very specific criteria may still qualify for a discharge in Chapter 7 bankruptcy

  • The past due taxes must be income taxes. 
  • The tax debt must be based on a tax return that was due to be filed at least three years prior to your bankruptcy. 
  • You must have actually filed the relevant tax return at least two years prior to filing for bankruptcy. 
  • The IRS must have assessed the taxes at least 240 days prior to your filing for bankruptcy. 
  • The tax debt cannot have been the product of fraud or intentional tax evasion. 

It is also important to note that even if the tax debt qualifies for discharge under these rules, bankruptcy does not release a federal tax lien that has already been recorded against your property. With all these exceptions, it seems clear that bankruptcy is often not the best method for discharging tax debt. Fortunately, there are other options for resolving past due taxes, including direct negotiation with the IRS and offers in compromise.

 

Topics:  Chapter 7, Consumer Bankruptcy, Tax Liability

Published In: Bankruptcy Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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