Can bankruptcy get rid of my tax debt?

Sat, Apr 21, 2012

Bankruptcy

Can bankruptcy discharge tax debt?SmithLaw is often asked this question during our bankruptcy consultations. Some income tax may be dischargeable during a Chapter 7 or Chapter 13 bankruptcy. (Other types of taxes are usually treated differently.) But specific rules govern what type of income tax debts can be discharged.

The basics:

  • Tax debts are all associated with specific years and tax returns.
  • Previous tax liens cannot be discharged.

Both Chapter 7 and Chapter 13 bankruptcies are for individuals, not businesses. (Chapter 11 is filed for businesses and high-earning individuals and Chapter 12 is filed by family farms or family fishermen.) Chapter 7 and Chapter 13 bankruptcies follow the same rules when it comes to tax debts. Once bankruptcy is filed, the petitioner will need to prove that they have filed tax returns for the four previous years and provide a copy of the most recent tax return. However, there are some differences between Chapter 7 and Chapter 13 bankruptcy when it comes to how debt in general is discharged. Chapter 7 bankruptcies can allow full discharge of debts, whereas Chapter 13 usually provides a payment plan of three to five years for some debts and a total discharge of others.

There are requirements that need to be met in order for the tax debts to be discharged. All of these conditions must be met:

  • The tax returns are valid and not fraudulent and the petitioner cannot be found to be evading taxes. This means you must have filed properly and must truly be unable to pay the taxes, not just be avoiding paying them.
  • The tax debt is old; it must have been due at least three years ago. (This date includes any filing extensions.) In addition, the taxpayer must have filed the tax return at least 2 years ago. (This date is the actual date the return was filed.) While this seems contradictory, the return could have been filed late or there may have been other circumstances that create this situation. In addition, these previous tax returns need to have been filed by the individual and not filed for them from a taxing authority.
  • Any assessment of tax is at least 240 days old. (An assessment is the IRS’s acknowledgment of your debt.) This assessment can be from an original tax return, because of an audit, or from a finalized assessment of proposed tax. You will usually receive statements about the assessment or you can contact the IRS to receive them.

In addition, no tax debts from unfilled returns or recent returns are dischargeable. Sometimes Chapter 13 bankruptcy is preferable for recent tax debt since it allows for payment plans that might work for the recent tax debts. The IRS is also sometimes willing to negotiate if there is a doubt of debt collection. They discuss this here.

A good starting point for Florida individuals looking to file bankruptcy is the website of the United States Bankruptcy Court for the Middle District of Florida. They have some educational videos and a guide for those wishing to learn more about filing for bankruptcy.

If you have really detailed questions about tax debt and bankruptcy, the IRS has a specific guide for this on their website that is a good place to start.

Researching your circumstances prior to meeting with a professional can be beneficial, as it provides a starting point for what you should discuss with an attorney. However, an Internet search is not equal to specific advice provided by a professional specializing in bankruptcy. They know the ins and outs of the law and are able to help you discover what situations and rules apply in your specific case.

Image credit: Tax Credits

 

 

 

 

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