Income tax debts may be eligible for discharge under Chapter 7 or Chapter 13 of the Bankruptcy Code.
Chapter 7 provides for the full discharge of allowable debts, meaning that you never have to pay those debts. Chapter 13 provides a payment plan to repay some debts, with the remainder of debts discharged. Under the new bankruptcy laws, tax debts are treated the same way in both Chapter 7 and Chapter 13 petitions. There are five requirements that must be met for income taxes to be dischargeable.
Five Rules to Discharge Tax Debts
If the income tax debt meets all five of these rules, then the tax debt is dischargeable in Chapter 7 and Chapter 13 bankruptcy:
1. The due date for filing a tax return is at least three years ago;
2. The tax return was filed at least two years ago;
3. The tax assessment is at least 240 days old;
4. The tax return was not fraudulent; and,
5. The taxpayer is not guilty of tax evasion.
Return Due At Least Three Years Ago
The tax debt must be related to a tax return that was due at least three years before the taxpayer files for bankruptcy. The due date includes any extensions.
Return Filed At Least Two Years Ago
The tax debt must be related to a tax return that was filed at least two years before the taxpayer files for bankruptcy. The time is measured from the date the taxpayer actually filed the return.
Tax Assessment At Least 240 Days Old
The IRS must assess the tax at least 240 days before the taxpayer files for bankruptcy. This is usually the date of filing the return.
Some Tax Debts Not Dischargeable
Tax debts that arise from unfiled tax returns are not dischargeable. The IRS routinely assesses tax on unfiled returns. These tax liabilities cannot be discharged unless the taxpayer files a tax return for the year in question.
Other Tax Issues in Bankruptcy
Before a Chapter 7 or Chapter 13 bankruptcy can be granted, the debtor must file returns for the four previous years. These must be filed no later than the date of the first creditors’ meeting.
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