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Discharging Income Taxes in Bankruptcy

On Behalf of | May 26, 2017 | Bankruptcy |

Benjamin Franklin is attributed to have said in regard to permanency that “in this world nothing can be said to be certain, except death and taxes”. Now little can be done about death, but taxes may not be as permanent as you think. There is a common misconception amongst Bankruptcy clients that income taxes cannot be discharged through bankruptcy. Often times this fear presents itself when someone operates a small business that fails leaving significant tax debt. Years later they are still trying to make payments or have turned to one of those fly by night tax helplines you see advertised in the middle of the night on television. It would seem that the tax debt disrupts sleep, because the commercials seem to be exclusively in the middle of the night. Well stop pacing your halls and get some sleep because relief through the bankruptcy process is available in certain circumstances for debt owed the government for taxes.

As a general rule taxes are nondischargeable in bankruptcy, but only for the first three years they are assessed. After three years, they can be discharged through bankruptcy, both in a chapter seven bankruptcy and chapter thirteen reorganization. There is a catch though. In order to be dischargeable you have to have followed the IRS rules.

First, you had to have filed the return. You cannot discharge taxes for a year in which you don’t file. All too many times I have encountered clients who failed to file their taxes because they knew or feared that they would owe money. Please, don’t do this! Even if you think or know you will have large tax debt, file the return. Not only do you risk prosecution criminally for failure to file returns, you destroy any ability to work out a deal with the IRS and you destroy any availability for relief through bankruptcy if you don’t file.

Not only do you have to file the return to be allowed to discharge the tax, you must also have filed it on time. Late filed returns are nondischargeable in the same manner as returns that are unfiled. Filing on time also includes allowed extensions. If you think that you cannot get your return filed in time for the deadline which applies to the type of taxes you file, file an extension. By extending you preserve your availability of relief thereafter.

Finally, your tax return must be honest and complete. You cannot discharge tax debt that was derived from fraudulently created returns. It doesn’t matter how bad the situation is, if you are honest with the government and cooperate, they often will work with you, and after three years the taxes can be discharged.

This blog article provides a brief description of issues pertaining to the discharge of tax debt. The nuance of bankruptcy law and its application requires the professional advice of a seasoned practitioner. I encourage you to contact us and let us take a look at your situation if you are facing tax debt, or any other financial crisis.

– Justin Raver