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I am Asked Often, Can I discharge State and Federal Taxes in Bankruptcy?

I am constantly trolling for new and exciting information.  Congratulations, I have found some relevant information.  Many of my clients inquire about what happens to tax debt once the client files a bankruptcy proceeding.  Normally, I don’t post the writings of an attorney, I just don’t like messing with fire.  However, Christopher Grafton with the Doan Law Office posted the following and it is right on point.

How many bankruptcy attorneys simply do not know that certain taxes can often be eliminated in bankruptcy? In a word, many. The truth is that most attorneys do not have a working understanding of which tax debts can be discharged,  and more specifically, the timing rules that control tax debt dischargeability.

You can discharge (wipe out) both state AND federal income taxes in both Chapter 7 and Chapter 13 bankruptcies, if you satisfy ALL of the following five requirements.

  1. Your taxes MUST be income taxes: Only income taxes are dischargeable. Other taxes such as payroll taxes, sales taxes, and property taxes cannot be discharged in bankruptcy.
  2. No fraud or willful evasion: Discharge is not available to those who have filed a fraudulent tax return or made any attempt to willfully evade paying taxes.
  3. Your taxes MUST be three years old: A Qualifying tax debt is one that was originally due at least three years before filing bankruptcy. (Example: Taxes due for the tax year 2006 were actually due April 15, 2007. Therefore, you must wait until April 15, 2010 to file if you want to eliminate debt. However, if you filed an extension for these taxes until October 15th, you also extend the three-year period to October 15th, 2010!
  4. Your tax return MUST have been timely filed: You must have filed the tax return at least two years before filing for bankruptcy. This is likely the most frequent reason for non-dischargeability of tax debt.
  5. You MUST satisfy the 240-day rule: Your tax debt must have been assessed at least 240 days (8 months) prior to the filing of your bankruptcy. An assessment is when the tax authority makes an official determination of the taxes you owe, which could be weeks or months after filing return. (Note: If your taxes are reassessed for any reason, you will be required to wait an additional eight months from the most recent assessment!)
    Also, you should know that an IRS offer in compromise will serve to suspend the 240-day period. Therefore, if you file a request for an offer in compromise one month after assessment, you will be required to wait an additional seven months after the offer in compromise fails or is rejected!

In the event that a tax debt is deemed non-qualifying or otherwise non-dischargeable, the debt will remain enforceable after Chapter 7 discharge and in Chapter 13 cases, the tax debt would be required to be paid in-full through the 36-60 month repayment plan.

This is great information.  My experience, taxes are not dischargeable, due to the lack of a timely filed return.  The best tax advice ever offered, “Always file the return, when it is due”.  If you owe taxes and creditors, and bankruptcy is your best option, contact a lawyer that understands what taxes are dischargeable and which taxes are not.  I cannot tell you how often I meet new clients that were not well represented in bankruptcy court.

We represent tax payers, it’s what we do.  We help people that have tax problems, every day.  We have a team of highly trained specialists that can help you with a small problem, or a large complicated problem.  No problem is too small, or too large.  If you have a tax issue, call now, delaying may hurt you more than you know.  Please call now, 1-877-489-8999.

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