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Everything You Need to Know About Discharging Tax Debts in Bankruptcy

Discharging Taxes in Bankruptcy

88621051You cannot escape from tax debts owed to the IRS. Luckily, there are a few options to eliminate them. Some tax obligations may be discharged and managed through bankruptcy. In the world of tax debts, this is only an option if your tax debt qualifies for a discharge. Here’s some advice from our Michigan Tax Lawyer, Venar R. Ayar on the bankruptcy law as it applies to tax debts.

Discharge Taxes in bankruptcy: Chapter 7 and Chapter 13.

Chapter 7 is the most common form of bankruptcy, known as liquidation bankruptcy, which involves the sale of a debtor’s non-exempt assets by a trustee. Any proceeds obtained by the bankruptcy debtors are then turned over to creditors. Chapter 13 does not involve liquidation, and usually a debtor is permitted to keep all of his property as long as the Chapter 13 plan complies with the law. Chapter 7 provides for full discharge of allowable debts while Chapter 13 provides a payment plan to repay some debts, with the remainder of debts discharged. Under the new law, tax debts are treated the same way in both Chapter 7 and Chapter 13 petitions. Keep in mind that not all tax debts are capable of being discharged in bankruptcy. The bankruptcy petitioner is the person or company who comes before the court to present a petition or to seek relief. A person may declare personal bankruptcy, or a company that wishes to declare business bankruptcy to gain relief from creditors. Most people believe that taxes are not dischargeable in bankruptcy, but that’s not the case. Debts are associated with a particular tax return and year. Petitioners must have tax debts that meet five certain criteria for discharge.

Bankruptcy Rules to Discharge Tax Debts

If your income tax debt meets all five of these criteria, then the tax debt is dischargeable in Chapter 7 and Chapter 13 bankruptcy petitions.

1. The due date for filling a tax return is at least three years ago. Before a taxpayer files for bankruptcy, the tax debt must be related to a tax return that was due at least three years before. This date includes any extensions.

2. The tax return was filed at least two years ago. A tax debt must be related to a tax return filed at least two years prior to the taxpayer filing for bankruptcy. The date is measured from the day the taxpayer actually filed the return.

3. The tax assessment is at least 240 days old. The tax must be assessed by the IRS at least 240 days before the taxpayer files for bankruptcy. The assessment could arise from a self-reported balance due, an IRS proposed assessment that has become final, or an IRS final determination in an audit.

4. The tax return was not fraudulent. In this case, filing for bankruptcy to discharge tax debts is out of the question.

5. Taxpayer cannot be guilty of tax evasion. You cannot file for bankruptcy with an intentional act of evading the tax laws.

Remember that this only applies to tax returns that have been filed. Unfiled returns are not dischargeable. The IRS usually assesses tax on unfiled returns. Tax liabilities cannot be discharged unless the taxpayer files a return for the year in question. Also, bankruptcy petitioners are required to provide a copy of their most recent tax return to the bankruptcy court. These rules are generally speaking. A number of factors can extend these time periods. A qualified professional must look through the transcripts to determine the exact date the taxes become dischargeable through bankruptcy. Bankruptcy tax debt is complex and the only way to efficiently determine if taxes are dischargeable in your case is to consult a tax professional, highly skilled to analyze your records and handle your situation. For more information on discharging your tax debts through bankruptcy, feel free to give us a call, or send us an e-mail here.

Venar Ayar, Esq.

Venar Ayar, Esq.

Attorney-at-Law, Master of Laws in Taxation
Principal and founder, Ayar Law

Venar is an award-winning tax attorney ranked as a Top Lawyer in the field of Tax Law. Mr. Ayar has a Master of Laws in Taxation – the highest degree available in tax, held by only a small number of the country’s attorneys.