How to Discharge Income Taxes in Bankruptcy
While there are some types of debts that are never dischargeable (such as child support), income taxes are not one of them. In fact, bankruptcy may actually be the best option for dealing with some unpaid income taxes.
Determining whether your taxes are dischargeable, though, can be quite complicated. Generally speaking, income taxes are dischargeable so long as the following three requirements are satisfied:
The tax return was due to be filed more than 3 years before the bankruptcy filing date;
The tax return was filed at least 2 years before the bankruptcy filing date; and
The taxes have been assessed for at least 240 days before the bankruptcy filing date.
These rules are not necessarily as clear as they may appear, and significant analysis of each tax year is required in order to determine whether any exceptions apply. For example, a request for an offer in compromise (an offer to settle the tax bill for less than the full amount) or a due process hearing (a hearing to challenge or negotiate tax liability) will stop the clock from running on the above timelines. An installment plan does not.
If the government is currently garnishing your wages or levying assets due to unpaid taxes, then these collection efforts must also stop upon the filing of a bankruptcy petition. The government may be able to apply this year’s tax refund to the unpaid taxes, but future refunds are protected.
If a tax lien has already been filed against your property, then you may also be able to significantly reduce or eliminate it. This lien will survive a discharge in a chapter 7 bankruptcy, but must be repaid in full during a Chapter 13 bankruptcy.
Finally, large tax debts may also help you qualify for Chapter 7 bankruptcy. In most cases, individuals must pass a Means Test in order to qualify for Chapter 7. However, the Means Test is only required for people who primarily have “consumer debt.” It is not required if someone’s debt is primarily business-related. Because most courts have held that income taxes are not “consumer debt,” they may also help you qualify for Chapter 7 regardless of your household income.
If you are struggling with unpaid taxes, then you may be able to discharge them through bankruptcy. The treatment of taxes in bankruptcy, though, can be very complicated. Please contact us today for a free consultation to review your case.
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Culik Law is a Massachusetts Attorney / Law Firm. The posts on Culik Law’s blog are not intended as legal advice. If you have questions about your particular situation, CONTACT CULIK LAW for a Free Consultation.