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New Mexico Lawyers Serving New Mexico's Legal Needs Since 1997

Tax debt and bankruptcy discharge

Most debtors assume that tax debt, like student loan debt, are simply non-dischargeable even while many other types of debts are. What most don't realize, though, is that while that is generally true, particularly for Chapter 13 filings, it might be possible to discharge limited tax debts under certain circumstances in a Chapter 7.

So, when is tax debt dischargeable?

Chapter 7 filings might discharge tax debts if some conditions have been met. These are:

  • The debt is for income taxes only - other types of debt (payroll, property, fraud penalties, etc.) are not eligible for discharge.
  • The debt is more than three years old - the tax debt must be of a certain age in order to be eligible; it must have been initially due a minimum of three years prior to the date of the bankruptcy filing.
  • The tax debt is not due to fraud or evasion - if the tax debt was punitive in nature because of fraud of willful evasion on the part of the taxpayer (such as fines or interest on past due taxes), it is ineligible.
  • You actually filed a tax return - unless you filed a non-fraudulent tax return for the debt, it is non-dischargeable; this goes for unpaid taxes where the IRS filed a "substitute return" on your behalf as well. Unless you filed the return yourself, it doesn't count. It must also be filed at least two years prior to the date of the bankruptcy filings.
  • You meet the IRS's "240 day" rule - the tax debt must either have been assessed a minimum of 240 days prior to the bankruptcy filing, or it must not have been assessed at all, otherwise it is not eligible.

Of course, even if your tax debt isn't dischargeable, that doesn't mean you shouldn't still file for bankruptcy. Freeing you from other debts could very well make it possible to cover the tax debts without difficulty. For more information about the interplay of all types of debts and bankruptcy, reach out to a bankruptcy 

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