Discharging Tax Debt Through Bankruptcy
For those concerned with past due income tax debt, bankruptcy is a powerful weapon to stave off the IRS, for it allows a debtor to gain a fresh start after financial turmoil. A bankruptcy allows the discharge of unsecured debt, such as credit card debt and medical bills, and most importantly, federal tax debt.
Whether tax debt may be discharged depends on a number of factors, including the type of tax, whether the debtor filed a return, and how old the tax debt is. Federal income taxes may be discharged in a Chapter 7 bankruptcy if the debtor meets all of the following conditions:
Income taxes are sought to be discharged: Payroll taxes and penalties for tax fraud may not be discharged.
The taxes stem from a legitimate tax return: The debtor filed a tax return for the relevant tax years at least two years before filing for bankruptcy.
The past tax debt is at least three years old: The tax debt was originally due at least three years before filing for bankruptcy.
The debtor did not commit willful tax evasion or tax fraud: If a debtor was penalized for (or suspected of) of evasive actions, such as repeated failure to pay taxes, hiding money or taxable assets, filing a blank or incomplete tax return; penalties stemming from tax evasion cannot be discharged. The same applies to charges levied due to tax fraud.
The 240-day rule applies: If the IRS assessed the tax debt at least 240 days before the bankruptcy petition is filed, the debt is eligible for discharge.
Just like other unsecured debt, a debtor is no longer responsible for paying taxes that are discharged. The IRS may not garnish a debtor's wages or bank accounts to collect this debt.
The preceding is not intended to be legal advice. If you have questions regarding discharging tax debt, an experienced bankruptcy attorney can advise you.
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Illini Legal Services is engaged in the private practice of law and is not a public legal aid agency. We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.