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Tax Debt

One of the Most Misunderstood Areas of Bankruptcy

You may see TV commercials offering the promise of eliminating tax debts. Not so easy, but a good way to handle your tax liabilities is through bankruptcy. Most tax debts can be wiped out through bankruptcy – but the process is complicated and not for the inexperienced bankruptcy attorney.

A Chapter 7 bankruptcy will probably be the better option – but only if your debts qualify for discharge (see below) and you are eligible for Chapter 7 bankruptcy. Otherwise a Chapter 13 would be an option – late fees, interest and penalties will stop and you can spread out the payment up to five years, with a possibility of paying only 10 cents on the dollar of the amount due.

How Can You Discharge A Tax Debt?

A discharge can wipe out debts for federal income taxes in Chapter 7 of Chapter 13 bankruptcy only if all of the following conditions are true:

  • The taxes owed must be income taxes. Other taxes, such as payroll taxes or trust funds, can never be eliminated through bankruptcy.
  • No fraud or willful evasion. If you filed an incorrect tax return or otherwise willfully attempted to evade paying taxes, filing for bankruptcy can’t help.
  • The debt must be at least three years old. To eliminate a tax debt, the tax return must have been due at least three years before you filed for bankruptcy.
  • You must have filed the tax return. You must have filed the return at least two years before filing for bankruptcy.
  • You pass the “240-day rule.” The income tax return must have been assessed by the IRS at least 240 days before you file your bankruptcy petition. (This time limit may be extended if the IRS suspended collection activity because of an offer in compromise or a previous bankruptcy filing.)

For a free consultation about taxes and bankruptcy, contact us at 630-761-5274.

We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.