On Monday, I talked about the extremely rare circumstances under which student loans can be discharged in bankruptcy, but today I wanted to focus on another common form of debt that can be just as difficult to discharge: tax debts. Unfortunately, many non-income tax debts cannot be discharged in Chapter 7 or Chapter 13 bankruptcy. Tax liens and certain employment taxes, for instance, will not be discharged in bankruptcy, and the debtor will either continue to owe them at the end of a Chapter 7 case or have to repay them in full through a Chapter 13 plan.
However, debts for federal income taxes can be discharged in Chapter 7, but only if the debtor is able to satisfy all five of the following requirements:
- The taxes are income-based — The tax debt has to be federal or state income taxes, or taxes on gross receipts, but no other taxes can be eliminated through bankruptcy.
- You filed the tax return at least two years before filing for bankruptcy — It is important to ensure the return is properly signed, mailed and sufficiently complete for it to be considered legitimate, as having the Internal Revenue Service (IRS) file a substitute for return will not satisfy this requirement.
- The tax debt is at least three years old — The tax return must have been originally due at least three years before the debtor files for bankruptcy.
- The debtor did not commit fraud or willful evasion — Bankruptcy will not be able to help an individual discharge tax debt if he or she is guilty of any intentional act of evading tax laws, including filing fraudulent returns.
- The taxes must have been assessed at least 240 days before filing for bankruptcy — The IRS must have assessed the income tax debt at least 240 days before a debtor files his or her bankruptcy petition. However, this time limit could be extended if there was an offer in compromise or a previous bankruptcy filing.
Taxes are another type of debt where it is definitely in your best interest to work with an experienced Washington DC or Maryland bankruptcy lawyer.
Law Firm of Kevin D. Judd – Maryland bankruptcy attorney