IRS and Bankruptcy: Are Income Taxes Dischargeable in Chapter 7 or Chapter 13?

IRS and Bankruptcy: Are Income Taxes Dischargeable in Chapter 7 or Chapter 13?

Often people are misinformed about Taxes and Bankruptcy. Whether due to the recent wave of foreclosures where people forget to adjust their income tax withholdings to make up for the loss of the mortgage interest deduction or because some individuals accept debt settlement offers and incur anticipated taxes since forgiven debt is taxable income, or because struggling small business owners have skipped making their quarterly tax payments hoping to catch up later, an increasing number of people owe the IRS.

Despite popular rumors to the contrary, some taxes can be discharged through a bankruptcy. To be dischargeable the taxes owed must fall within very specific guidelines. To discharge income taxes and completely eliminate the debt, including interest and penalties, all of the following must be true:

  1. The tax year for which the debtor owes the taxes must be more than 3 years before the date of the bankruptcy filing AND
  2. The tax returns themselves must have been filed properly AND
  3. The assessment of taxes against the debtor must have been done more than 240 days (so about 8 months) before the date of the bankruptcy filing AND
  4. The IRS has not recorded a Notice of Federal Tax Lien.

If all of the above are true, you may be able to discharge the debt through a Chapter 7 Bankruptcy.

To obtain the assessment date, a debtor or the debtor’s attorney should contact the IRS.

To see if a lien has been placed on your property you may need to do a search on your property at your local county’s recorder’s office. Even if a lien has already been placed, depending on real estate valuations, you may be able to limit the damage by filing for Bankruptcy relief.

Sometimes timing is everything. Often debtors file for bankruptcy in order to protect important assets and property. However, when an overwhelmed debtor is also dealing with significant tax debts and can either afford to wait it may be wise to delay the filing. One should do a complete analysis of all debts and other important considerations to weigh the benefits and cons of waiting.

When owed income tax is recent or for other reasons non-dischargeable, but makes up a significant percentage of the total debt, it may be worthwhile to consult with a Tax Attorney who may be able to negotiate payments or a settlement through what is known as Offer in Compromise. If after diligent attempts, no agreement can be reached, a Bankruptcy Chapter 13 can propose a repayment plan over a period of 3 to 5 years. This effectively stops bank levy, wage garnishments, and accruing penalties.

Kathryn U. Tokarska, Esq. is admitted to practice in State of California. Graduate of California Western School of Law in San Diego, California, Ms. Tokarska concentrated her legal studies in area of Bankruptcy, Estate Planning, Taxation, Securities Regulations, and Real Estate Finance. She has over fourteen years of experience working for major financial investment institutions, offering financial planning services, investment products, wealth building and preservation strategies. Ms. Tokarska holds a Financial Paraplanner certificate, was a licensed stockbroker, and is currently enrolled in an LL.M. in Bankruptcy/Finance at Thomas Jefferson School of Law.

For assistance, contact Tokarska Law Center online, by Emailing Us, or by phone (619) 285-1992. We are a FEDERAL DEBT RELIEF AGENCY. We help people file for Bankruptcy Protection under the Federal and State Laws.

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