Tax Debt in Chapter 7 and Chapter 13 Bankruptcy – Tucson Bankruptcy Lawyer

Are tax debts dischargeable in bankruptcy?  Have you consulted an experienced Tucson bankruptcy lawyer regarding your tax debt?

Some tax debts are dischargeable in Chapter 7 and Chapter 13 bankruptcy.  In order for a tax debt to be dischargeable in bankruptcy it must satisfy the following five (5) requirements. 

1.     The taxes are income taxes.  Only income taxes are dischargeable in bankruptcy.  Other taxes such as payroll taxes or fraud penalties cannot be eliminated in bankruptcy.  Interest accrued on dischargeable tax debt is dischargeable in bankruptcy as well. Penalties may be discharged even if the tax debt does not qualify for discharge.

2.     The debt is at least three years old.  The tax debt must be related to a tax return that was due at least three (3) years prior to filing bankruptcy.  This date includes any extensions.  For example, if you owed income taxes for a 2010 tax debt for which your extensions expired October 15, 2011, the tax debt is not eligible for discharge until after October 15, 2014.

3.     The tax return was filed at least two years agoThe tax debt must be related to a tax return that was filed at least two years before filing bankruptcy. The two years is measured from when the tax return was filed.  Federal taxes are considered filed when they are mailed, or the date the IRS received them if they are late.

4.     The tax assessment is at least 240 days old.  The tax debt must have been assessed at least 240 days prior to filing bankruptcy. Examples of a tax assessment include a self-reported balance, an IRS final determination after an audit, or a proposed assessment by the IRS that has become final.  The 240 day rule may be extended if the taxing authority was prohibited from making an assessment, such as if you were in bankruptcy or had made an offer in compromise.

No Fraud or Willful Evasion.  The tax return must not be fraudulent or frivolous, and you cannot have willfully evaded paying your taxes.  An example of fraud is using someone else’s social security number on a tax return.  Willful evasion may include reporting less income than what was earned or deducting fictitious expenses.

If you have filed Chapter 7 bankruptcy and your tax debt satisfies the above requirements, you will be entitled to a complete discharge of the debt.  Alternatively, if your tax debt qualifies and you have filed Chapter 13 bankruptcy, you will be required to pay some or all of the debt through a three to five year repayment plan.

If you have significant tax debt you should consult an experienced Tucson bankruptcy lawyer to find out whether you tax debt may be eliminated in Chapter 7.

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