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Can you Discharge Income Taxes in Bankruptcy?

income tax discharge

For individuals who have fallen on hard financial times, Chapter 7 bankruptcy can often be a viable option to eliminate their debt and gain a fresh start. This option is frequently used for those who have a high amount of debt and very little income to pay it back. You can get rid of most unsecured debt through Chapter 7; examples include credit cards, medical bills, and personal loans. There are some debts, however, that are not dischargeable through Chapter 7. These include student loans and in most cases income taxes.

Although income taxes are not usually dischargeable through Chapter 7 bankruptcy, there are some exceptions. You can discharge income taxes in bankruptcy if these are actual income taxes, as opposed to payroll taxes such as Social Security and Medicare, an original tax return was filed for them, and you did not commit fraud or willful tax evasion. In addition to these conditions, you must meet all of the following requirements to have your income tax debt forgiven through Chapter 7:

The Three-Year Rule

Your taxes must have been due at least three years prior to your bankruptcy filing. For most individuals, their income taxes are due by April 15 of each year. One notable exception is for those who are self-employed and are required to pay income taxes quarterly. For example, if your back taxes were for the 2014 tax year, they would have been due April 15 of 2015. This means that to be eligible to discharge these back taxes in this scenario, you must have filed for bankruptcy after April 15, 2018.

The Two-Year Rule

This rule applies to the date in which you filed your income tax return. Your tax return must have been filed at least two years prior to filing for Chapter 7 bankruptcy, even if you filed your tax returns late. Using the previous example, if your taxes were due April 15 of 2015 and you filed for bankruptcy on April 15, 2018, you would need to have filed your income tax return by April 15, 2016 to have your tax debts discharged.

The 240-Day Rule

Taxes must have been assessed by the IRS (or another taxing agency) at least 240 days prior to filing for bankruptcy, or not assessed at all. The date the IRS assesses the tax is generally the same date that they receive and process your tax return. This, however, assumes that the IRS agreed with the amount of taxes owed that you put on your return. If the IRS audits your return later and assesses a different amount owed, you must wait at least 240 days (from the date of the latest assessment) to file your return.

There are instances in which some of the time period requirements may be suspended or “tolled”. Examples may include previous bankruptcy filings, a request for an appeal or hearing of an IRS collection action, a pending offer in compromise that was made to the IRS, and pending litigation against the IRS.

Can You Discharge Income Taxes with Chapter 13 Bankruptcy?

If you do not qualify for Chapter 7 bankruptcy or do not wish to go that route, Chapter 13 bankruptcy might be a viable option for discharging at least some of your income tax debt. Chapter 13 is a court-approved debt consolidation plan that allows you to pay back your debts over a three to five-year period with a manageable monthly payment. In many cases, Chapter 13 filers do not end up paying back 100% of what they owe.

Federal income tax debt can be paid back in a manageable way with Chapter 13, and if you meet the three-year rule, two-year rule, and 240-day rule and other aforementioned requirements, your tax debt can be included as non-priority debt. This means you would likely not have to pay back all of it. If your tax debt is more recent or otherwise fails to meet the requirements, it becomes priority debt and must be repaid in full.

Tax Liens Cannot be Discharged

If you owe a large tax debt, the taxing authority could file a lien on your property to turn it into a secured debt. Once your tax debt becomes a tax lien, it cannot be discharged regardless of which type of bankruptcy you file.

Speak with an Experienced Alabama Bankruptcy Attorney

Determining which taxes are dischargeable through bankruptcy can be a complex process. There are specific requirements that must be met, and it is important to review your situation with a knowledgeable bankruptcy lawyer to determine whether or not your tax debts can be discharged.

At The Dansby Law Firm, P.C., we have several years of experience helping clients facing financial difficulty. We can thoroughly review your options and determine the best path forward based on your unique situation. For a personalized consultation with one of our attorneys, call us today at 334-834-7001. You may also send a secure and confidential message through our online contact form.

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