Tax Debt and Bankruptcy
Can you discharge tax debt in bankruptcy?
You can discharge tax debt in bankruptcy. Many think this can’t be done. Tax debts and bankruptcy is a complex area.
But Even the IRS will tell you it’s possible, along with other ways to deal with tax debt you cannot afford to pay. However, as you might expect, you’ll run into complex rules and limitations.
There are different bankruptcy approaches to discharging tax debt. Although the bankruptcy code makes it clear that you can discharge taxes in bankruptcy, many people still believe otherwise. I’m admitted to the U.S. Tax Court, and have discharged over $100,000 in taxes for clients over the years. If you owe taxes, bankruptcy is a tool you should investigate as an option to resolve your tax debt. Tax debts and bankruptcy do go well together, sometimes.
This article hits only the general highlights of a very complex topic. Although I encourage my clients doing internet research, I strongly urge everyone with tax debt seeking discharge to make an appointment to discuss their situation.
Tax debt in bankruptcy is an area for experienced professionals only. In fact, many attorneys consult me for their questions on tax debts and bankruptcy.
Can I Discharge Tax Debts and Bankruptcy in Chapter 7
Learn the three basic rules. Three years, two years, and 240 days.
3 year rule says that your taxes must be at least three years old.
The three years begins on the date the taxes were last due without penalty. This means that extensions count. The date is the last day of the extension, even if you filed your return before the extension deadline.
The two year rule says that you must file your return more than 2 years before you file your bankruptcy. This mans you actually have to file the return. If the IRS filed your return for you, this will not satisfy the rule. If the IRS files the return, this is called a substitute for return.
There is currently a lot of litigation about this issue, and some courts hold you can NEVER discharge taxes if the IRS has filed your return, which means you filed your return late. Even by one day, say some courts.
The 240 day rule requires that the taxes be assessed for more than 240 days. In most cases, this is the date that you file your tax return. But sometimes not. If you get audited, or if you file a corrected tax return, a 1040x, or if you disputed your taxes, then the assessment date will be a date other than the date you filed, usually much later.
Practical Advice on Discharge of Tax Debts and Bankruptcy
Nobody needs trouble with the IRS. Having discharged taxes for over 30 years, I’ll share my approach to this complex subject with you. If I am discharging tax debt for a client, I favor a chapter 13 bankruptcy. Why? Because my clients get a Federal Court Order that binds the IRS. Tax debts and bankruptcy are better resoled if you can have confidence in the outcome. For me, that means a Federal Court Order – a discharge in bankruptcy.
The IRS attorney has to participate in the case, and if there are any questions we get them resolved, in the case. We get the Court to rule on the issues, if we have to. This way, my clients get a Court Order which the IRS will not argue with. This saves problems in the future, and provides certainty and peace of mind to my clients.
If you have tax debts, one way to deal with them is through bankruptcy. There are others, like the offer in compromise program. But, following that program deals with only taxes, not the rest of your debt. So, why attack debt problems piece-meal? Get one program to handle them all.
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