Most tax debt can not be eliminated in a bankruptcy. There are several ads in the media which make claims which make people hopeful that they may be able to eliminate their tax debts by filing for bankruptcy. These ads make this process seem for less complicated than it actually is to have this done successfully. In most cases tax debts can not be discharged this way. They can remain even after the end of a Chapter 7 bankruptcy case. When a Chapter 13 bankruptcy is filed for tax debts must be repaid in full as part of a repayment plan.
Those in need of having tax debts discharged are better off filing for Chapter 7. Although this is only a better option if they qualify for discharge. Listed below are some of them which can be discharged in a bankruptcy.
Tax Debts which can be Discharged
It is possible to discharge federal income tax debts through Chapter 7 if all of the following conditions are true to your situation.-
- Income Tax Debt Qualifies. Only income taxes can be discharged in a bankruptcy. Additional tax debt which is anything other than income taxes can not be eliminated. Some of these additional tax debts include payroll taxes and fraud penalties.
- Filed Tax Return. Income taxes must have been filed a minimum of two years before your bankruptcy filing date.
- Passing the “240-day rule.” In order for income tax debt to be eligible for elimination consideration must have been assessed a minimum of 240 days by the IRS before you file. The only exception to this rule is if the it has not been assessed as of the date you have filed for bankruptcy. It is possible to have this time limit extended if the IRS has suspended collection attempts for special circumstances.
- No Fraud or Willful evasion. You must prove that you did not file a tax return fraudulently. You must also prove that you did not knowingly attempt to evade paying taxes through means such as giving false information on your tax return.
Should your tax debts not qualify for discharge under the terms of Chapter 7, your victory may not be fully satisfied with the end results. This is due to the fact that Chapter 7 will not discharge previous tax liens. A bankruptcy will only eliminate your personal obligation to repay the tax debt. Chapter 7 will block the IRS from seizing your bank accounts or garnishing your wages. Although if the tax lien on your property was made by the IRS prior to you filing date, then the lien will remain in effect. If this is your circumstance then you will have to pay off the lien or successfully sell the property in order to eliminate the lien.
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