Bankruptcy and Taxes

For most people, owing the Internal Revenue Service is a frightening thought.  The IRS has the power to levy against your property if you do not pay your taxes.  A tax lien can prevent you from selling your home, borrowing money, and purchasing real estate.  It could also result in a wage garnishment.  If you owe taxes to the Internal Revenue Service, filing bankruptcy may help you resolve your tax problem.

Are Taxes Dischargeable in Bankruptcy?

A common misconception about bankruptcy is that taxes are non-dischargeable.  While most taxes are non-dischargeable, this does not apply in every situation.  In order to determine if the taxes you owe meet the criteria to be eligible for a discharge, you should consult with an experienced bankruptcy attorney. The attorney must review your specific situation to determine if the taxes you owe meet all five criteria to be discharged through bankruptcy.

  1. Income Tax Debt – You can only discharge income taxes through bankruptcy. Penalties for fraud, payroll taxes, and sales tax are not dischargeable in bankruptcy.
  2. Fraud and Evasion – If you try to avoid paying your taxes or you committed fraud with regard to filing your tax return, the taxes owed cannot be discharged in bankruptcy.
  3. Age of the Taxes – In order to be dischargeable through bankruptcy, the income taxes must have been incurred at least three years before the filing of the bankruptcy.
  4. Date Tax Return was Filed – The tax return that created the tax debt must have been filed at least two years before the filing of the bankruptcy.
  5. 240-Day Rule – The last requirement to discharge income tax through bankruptcy relies on the IRS. The tax debt must have been assessed by the IRS at least 240 days before the filing of the bankruptcy.

An experienced bankruptcy attorney should review the entire situation to determine if your income taxes are potentially dischargeable through bankruptcy. Because the IRS can extend deadlines, it can be difficult to determine the exact date to calculate the 240-day rule. If your taxes do not meet these criteria, you may still be eligible to resolve your tax problem through a Chapter 13 bankruptcy.

Chapter 13 and Tax Debts

In many cases, debtors who owe tax debts can resolve the problem by filing a Chapter 13 bankruptcy case.  In a Chapter 13 case, the debtor can stretch out the tax debt over a 60-month bankruptcy plan.  Typically, the filing of a bankruptcy will stop the IRS from continuing to add penalties and interest to the total amount owed.  This gives the debtor the opportunity to resolve the tax problem permanently rather than fighting for years to pay a tax debt that continues to increase due to penalties and interest.

For most people, filing a Chapter 13 bankruptcy not only resolves their tax problems but it also gives them a much needed fresh start to recover after a financial crisis.  The Chapter 13 bankruptcy can discharge medical bills, credit card debt, personal loans, and other types of unsecured debts.  It can also protect the debtor’s home, car, and other personal property from the IRS, other creditors and the court.

Tax Debts in Bankruptcy

Due to the complex nature of taxes and the fact that tax debts can be categorized as secured debt, priority unsecured debt, or unsecured debt, an attorney must carefully review the tax debt in order to determine the best way to resolve the tax debt through bankruptcy.  Once the attorney analyzes the taxes that you owe, he will advise you of the best way to resolve your tax debt so that you can put your debt problems behind you and improve your financial well-being for the future.

Contact an Experienced Bankruptcy Attorney

If you are dealing with overwhelming financial problems and harassing debt collectors, contact Weston Legal, PLLC to discuss your bankruptcy options.  We will help you find the best solution to solve your debt problems.

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