Getting Rid of Tax Debts Through Bankruptcy

Income tax
“You can’t get rid of taxes in bankruptcy.” True or false?

A lot of people, even many bankruptcy attorneys, believe that taxes cannot be discharged in bankruptcy.  There are many tax debts that do survive bankruptcy such as “trust fund” taxes (i.e. taxes withheld from an employee’s paycheck).  However, some income taxes can be discharged in bankruptcy and there are 5 key elements to analyze in order to determine if your unpaid income taxes can be discharged in Chapter 7 or Chapter 13 bankruptcy.

1.  The tax return must have been due at least 3 years ago.

For most people, tax returns (and taxes) are due April 15th of each year.  For example, tax returns for 2007 were due on April 15, 2008.  Someone seeking to discharge income taxes for 2007 would have to wait until at least April 15, 2011 before filing their bankruptcy case.  If you requested an extension, then this could further delay a bankruptcy filing.

2.  The return must have been on time or no less than 2 years ago.

If you haven’t filed your tax return, you cannot receive a discharge of your taxes.  However, you can discharge income taxes even if you filed your return your return late.  You must wait to file the bankruptcy petition until at least 2 years after you filed the tax return.

3.  The taxes must have been assessed more than 240 days ago.

This deadline won’t be an issue for most debtors.  However, taxes are sometimes assessed years later after an audit or the discovery of an error in mathematical calculations.  Even if you filed your tax return on time, taxes assessed within 240 days of the bankruptcy petition will not be discharged.

4.   No tax lien filed.

A bankruptcy discharge only removes the personal liability for the taxes.  A lien will generally survive a Chapter 7 bankruptcy, meaning that the IRS or state agency can go after your personal property after the bankruptcy is over.

In Chapter 13, you may “strip down” the lien down to the value of the property and pay that amount over the life of the plan.

5.  No discharge for fraud or tax evasion.

Lying on your tax return can be the basis for denial of a discharge of income taxes.  Failing to report all of your income, hiding assets or misleading the IRS could be characterized as fraud or tax evasion.

You should consult an experienced bankruptcy to determine if you can discharge your taxes in a Chapter 7 bankruptcy or Chapter 13 bankruptcy.  If you are in Southern California and are experiencing tax or other debt problems, please call me today at (619) 448-2129 for a free consultation.

Photo credit:  alancleaver_2000

Carl Starrett

Carl Starrett is a consumer bankruptcy attorney in San Diego, California helping debtors file for protection under Chapter 13 and Chapter 7 of the Bankruptcy Code.

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