One of the reasons why you could file for bankruptcy is to discharge your taxes. There are several state, federal and local income taxes that can be discharged under the various chapters of bankruptcy. However, discharging taxes under the chapters of bankruptcy isn’t as easy as it seems. There are several things that need to be understood before anyone tries to discharge their taxes using bankruptcy. Before you decide on filing for bankruptcy for discharging your income taxes, consult an attorney in your state who specializes in bankruptcy. The three chapters on bankruptcy – Chapter 7, Chapter 11 and Chapter 13 have different clauses for discharging taxes and only an expert can give you the right method.
While the law does allow debtors to discharge several taxes under bankruptcy, not all income taxes can be discharged. There are certain criteria that you have to meet to be eligible to let go of tax obligation under bankruptcy laws. The five considerations are mentioned below –
Return Due For Three Years – If you want to discharge your income taxes, they will have to be due for at least three years before the time of filing bankruptcy. If the tax payer received an extension from the state (which is not uncommon), the time of filing a bankruptcy will automatically be from the date of extension.
Return Filed Two Years Ago – This is often called the 2-year rule where the tax payer must have filed his income tax returns at least two years from the date of filing for bankruptcy. This means that a person has to file the tax forms at least two years before filing for bankruptcy. However, if a person doesn’t file for a return even after it is due in a tax year, the tax for that year cannot be discharged or shown under bankruptcy. It must be remembered that if the IRS files the return for the tax payer, it will not come under this rule.
Tax Assessment Done 240 Days Ago – Under the 240-days rule, your taxes must be assessed at least 240 days before you filed for bankruptcy. Usually the IRS assesses your tax returns as soon as you file your returns. However, if you seek a correction in the IRS audit, the 240-day cycle starts afresh from the day of the new assessment.
Even after you meet one or all the three considerations mentioned above, you have to understand that not all taxes can be discharged under bankruptcy. Exceptions include –
Filing Fraudulent Returns or Evading Taxes – If the IRS finds that you have used fraudulent methods to pay your taxes, you cannot discharge your taxes. At the same time, if it is found that you have willfully tried to evade tax, you are not eligible for discharge.
Other Taxes – While income tax can be discharged under bankruptcy, several other state, federal and local taxes cannot be discharged under bankruptcy.
Tax Liens – A tax lien is not included under discharging income tax. You will continue with your tax lien that can include lien against property during the process of bankruptcy.
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