Can bankruptcy discharge past due income tax debts?

February 23, 2013 (Press-News.org) Tax season brings up worries for those who cannot pay a large looming tax bill. Alternatively, tax liabilities may have compounded over several years with penalties and interest making it impossible to pay off the debt. Some may wonder if a bankruptcy filing can remove past due income tax debts.

If the taxes meet the following requirements, they are dischargeable along with all the regular unsecured debts in either a Chapter 7 or Chapter 13 bankruptcy.
Timing rules

The year of the tax debt is important when reviewing whether a Chapter 7 bankruptcy might help. Because of the specific timing considerations, a consultation with a bankruptcy attorney is invaluable in determining whether bankruptcy is the best route for your individual circumstances.

If you filed a fraudulent tax return or willfully attempted to avoid paying taxes, such as failing to disclose foreign account holdings, discharge through bankruptcy is not possible. When there is no evidence of fraud, the only way to discharge federal tax debts is to follow several rules found in the Tax Code. The following timeframes are important:
- Three years - it must be more than three years since the taxes were due. This would usually be April 15 or October 15, in the case of an extension in a prior year.
- Two years - the actual tax return must have been filed more than two years prior to the filing of the bankruptcy petition.
- 240 Days - the IRS assessed tax liability needs to have occurred at least 240 days prior to bankruptcy protection.

Some events stop the clock or toll the statute of limitations. For example, an Offer in Compromise will delay the 240-day rule from the time of the offer to when the IRS either rejects or accepts it. On the other hand, an installment agreement does not toll the statute of limitations.

No discharge for certain tax debts

The following tax debts are not eligible for discharge through Chapter 7 bankruptcy:
- Penalties incurred from tax debts
- Debts from unfiled returns
- Withheld payroll taxes
- Business, State and sales taxes

However, in a Chapter 13 plan, you can pay taxes that are NOT dischargeable over 36 to 60 months with no penalties and no new interest. After a Chapter 7, you would still owe the non dischargeable taxes and have to deal with the IRS. Bankruptcy protection can thus resolve many tax problems.

If you are struggling with past due tax debts, consult a bankruptcy attorney to discuss your situation. An evaluation of your tax problems, in addition to other debts, is one way to figure out a pathway toward financial stability. A bankruptcy filing is one way to start fresh.

Article provided by Redman Ludwig, P.C.
Visit us at www.redmanludwig.com