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When tax debt may be eliminated through bankruptcy


If tax season is time of worry and turmoil about how much you owe Uncle Sam, or how you will ever get out from under tax debt, this post may be for you. Bankruptcy can be a helpful tool to discharge old tax debt and create a viable plan to escape crushing debt at the same time.

Generally speaking, tax debt falls under the category of “non-dischargeable debt.” This describes  a category of debt that may not be eliminated without certain conditions being satisfied that would allow it to be discharged as a matter of law.

For back income taxes to be deemed dischargeable under Bankruptcy Code §507(a)(8)(A)(i), such debt must be at least three years old. This means that back income taxes owed from the 2015 tax year and earlier could be discharged.

Additionally, income tax returns must have been filed at least two years before a bankruptcy petition is filed according to Bankruptcy Code §523(a)(1)(b)(ii).  The returns also have to have been timely filed (filing with an extension is still timely).  

Finally, the tax burden must have been assessed at least 240 days before the bankruptcy petition is filed. The application of these timelines may be different if any returns were amended, corrected or audited.

It is also important to know that dischargeable tax debt must originate from a legitimate tax return. Debt that originates from falsified tax returns, especially additional taxes, penalties and interest stemming from such a return may not be discharged regardless of when it originated.

If you have mounting tax debt, a conversation with a bankruptcy attorney could be helpful. Bankruptcy allows debtors to create plans to pay portion off the debt over time. Once the payment plan is completed, the remaining debt may be discharged. For people who owe back property taxes and income taxes, bankruptcy is helpful in keeping a home and halting additional actions to foreclose liens. However, bankruptcy cannot be used to discharge payroll taxes and similar taxes owed by business owners.

With the tax filing deadline nearly five weeks away, it will be interesting to see how many people seek bankruptcy protection due to tax issues.

The preceding is for informational purposes only and is not legal advice.

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