Should You Discharge Your Tax Debt through Bankruptcy?

It’s A Complicated Relationship For Bankruptcy and Tax Debts

Some people who end up in tax debt may try some creative ideas to make it go away. One of those ideas may be filing for bankruptcy.

Bankruptcy typically provides a fresh start free of the piled up debt. While your credit may take a hit for a while, the overarching debt – including tax debt –  can go away.  But bankruptcy’s relationship with tax debt isn’t as simple as everyone would think. Here is some helpful information.

First off, it’s more complicated than you think as a lot of factors are at play, including when the tax was incurred, the type of debt to be discharged, and whether returns were filed.

Income taxes are the only type of taxes that can be discharged. If the tax debt is for payroll taxes, the taxes will not go away. Also, penalties for fraud won’t go away through a discharge either. The law’s not that generous for fraud, and if a back tax debtor did commit fraud, bankruptcy to discharge tax debt isn’t an option.

Tax debtors looking to discharge tax debt can’t have too recent of tax debt. Generally, the rule is that the back tax debt has to be related to a return that was due for filing at least three years before the bankruptcy filing.

Also, the tax debt assessment has to happen at least 240 days before the bankruptcy filing. This is about eight months, so a little bit of patience will be required.

Another key point to consider relates to the filing date for the return in question. The return that creates all the tax debt has to be filed at least two years before the bankruptcy filing.

Tax evasion will shoot down any hopes of discharging tax debt through a bankruptcy. This occurs when tax debtors hide money from the government or try to alter their identity.

After meeting all this, another hoop awaits. The bankruptcy filing cannot be granted unless the debtor shows that his or her four previous tax filings were filed with the IRS. And, they can’t be filed any later than the first creditor’s meeting.

So, if you’re hoping to file a Chapter 7 or Chapter 13 bankruptcy to discharge some back tax debt, it may not be as easy as it sounds. There’s a few hoops to jump through, and the rules work against unscrupulous tax debtors who try to avoid the long arm of the law. But with the help of a tax attorney and with some cleaning up of your financial history, a bankruptcy may just be able to discharge your tax debt.

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