When filing for bankruptcy, one of the questions often asked is whether or not tax debt is dischargeable. The long and short of it is yes and no. Yes, some tax debt is dischargeable, as long as certain requirements are met. And no, most tax debt cannot be discharged.
WHAT TYPE OF TAX DEBT IS DISCHARGEABLE?
The tax debt must be income tax. If the income tax debt meets all five of the following rules, then the tax debt is dischargeable in Chapter 7 and Chapter 13 bankruptcy petitions:
- The deadline for filing the tax return was at least three years ago (including any extensions). The tax debt must also be related to a tax return that was due at least three years before the bankruptcy was filed.
- The tax return(s) were filed at least two years prior to the filing of the bankruptcy petition. The tax debt must be related to a return that was filed at least two years before the bankruptcy was filed.
- The tax assessment is at least 240 days old. The IRS must assess the tax at least 240 days before the taxpayer files for bankruptcy.
- The tax return was not fraudulent. The tax return cannot be fraudulent or frivolous.
- The taxpayer is not guilty of tax evasion. The taxpayer cannot be guilty of intentionally evading tax laws.
Recalling that bankruptcy discharges debts only and not liens, a tax debt that is dischargeable as set forth above may still be collected by the IRS if a statutory lien exists thereon. This is a very complex area which must be examined in detail in evaluating whether or not the tax debt can be eliminated in a taxpayer’s bankruptcy proceeding.
WHAT TYPES OF TAX DEBT ARE NOT DISCHARGEABLE?
Tax debts from unfiled returns and trust fund taxes are not dischargeable. The taxpayer must have filed a return for the year(s) that the taxes were due.
THE BANKRUPTCY PROCESS
When an individual files for bankruptcy, he or she will receive some immediate relief, since the Bankruptcy Code provides for an automatic stay against collection efforts, including wage execution and communications from creditors. If your debts are discharged in your bankruptcy, you will no longer be under the obligation to repay those debts and you may begin to rebuild your credit.
The process can be a complicated one that requires a lot of paperwork and filings with the Court. You will need to gather all of your asset and debt information, bank records, tax records, and pay statements. It is important to hire an attorney who specializes in bankruptcy law, can explain your options, and counsel you through the process.
We can help
The Kridel Law Group has the experience necessary to provide our clients with the right approach when dealing with their debt relief options. Contact a lawyer at the Kridel Law Group today by calling (973) 470-0800 to schedule a consultation at our offices in New York and New Jersey.