Can Bankruptcy Improve My Income Tax Problems?

September 15, 2012

The dischargeability of income tax is one of the most complicated matters to assess in a <a target="_blank" href="http://www.greaterbostonlaw.com/Bankruptcy-Law/Bankruptcy-Chapter-7.shtml]personal bankruptcy[/url]. Therefore, you should never try to apply any rule you hear to your situation without the input of an experienced bankruptcy attorney...but

If the return was due more than 3 years ago

AND

The return was actually filed more than two years ago

AND

The tax was assessed more than 240 days ago.

The tax is probably dischargeable in both Chapter 7 and Chapter 13 of the Bankruptcy Code.

All bets are off if the return is fraudulent. The tax will not be dischargeable. Also, a filed tax return signed by the taxpayer showing a tax due constitutes an assessment. The assessment need not be in the form of a letter from the IRS.

Even if the tax is not dischargeable, the filing of Chapter 13 can still provide excellent financial incentive to the Debtor/taxpayer. Since the non-dischargeable tax debt is given priority in Chapter 13, the 13 plan payment will go to retiring the tax debt first, before any payments are required toward unsecured dischargeable debt (such as credit cards).

An additional benefit, particularly in cases of substantial tax debt, is the 0% interest being charged on the tax debt during the plan period. The statutory interest rate on the tax debt continues to accrue until the tax is paid. The Chapter 13 filing gives protection against this onerous reality.

Finally, and also significantly, penalties and interest on the tax debt may be treated as dischargeable in certain circumstances, allowing even more of the plan payment to go to retirement of the tax debt. Much of the tax debt out there today is attributable to interest and penalties.

Article provided by Nashawaty & Rand PA
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