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Tax Bankruptcy

Taxpayers who are considering bankruptcy because of tax problems are almost always concerned about income tax or other taxes that they owe to the Internal Revenue Service or other tax agencies. Many have the false belief that taxes can never be discharged in bankruptcy. This is not true, if the tax debt is old enough and several other conditions can be satisfied.

Income Taxes

Income tax debts, generally, are dischargeable if the Taxpayer meets all of the following conditions:

  1. The tax return filed for the year or years in question was legitimate (nonfraudulent). If the Internal Revenue Service completes a Substitute For Return for the Taxpayer, his or her return is not considered filed.
  2. The liability the Taxpayer wishes to discharge is for a tax return that the Taxpayer actually filed at least two years before he or she filed for bankruptcy.
  3. The tax return for the liability the Taxpayer wishes to discharge was due at least three years before he or she filed for bankruptcy.
  4. The Internal Revenue Service has not assessed the Taxpayer’s liability for the taxes within 240 days before the bankruptcy filing date.

If the Taxpayer meets each of these four requirements, his or her personal liabilities for the taxes should be discharged. However any lien placed on the Taxpayer’s property by the taxing authority will remain after the bankruptcy.

While income taxes are dischargeable in certain circumstance as discussed above, other types of taxes are frequently not dischargeable. The specific rules depend on the type of tax.

Property Taxes

Property taxes aren’t dischargeable unless they became due more than a year before the bankruptcy filing debt. However, after discharge the tax lien will remain on the real estate in question.

Fraudulent Taxes

Tax debt cannot be discharged that is the product of willful evasion of tax obligations or for which a tax return was not filed by the Taxpayer. Income tax returns filed on behalf of the Taxpayer by the Internal Revenue Service do not qualify the Taxpayer for discharge of income tax debt.

Other Taxes

Other types of taxes that generally aren’t dischargeable are mostly business related including the “trust fund” portion of employment taxes. Sales and use tax are also, generally, not dischargeable in bankruptcy.