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A Guide To Taxes That Can and Cannot Be Eliminated in Chapter 7 Bankruptcy

When bankruptcy is the only route to take in the face of overwhelming debt, it is important to be aware that some tax debt may be discharged while other taxes are not eligible for discharge. Most tax debt is eliminated under Chapter 7 Bankruptcy while Chapter 13 Bankruptcy requires a payback plan. Use this review of taxes that can and cannot be eliminated as a guide, and always retain the most experienced tax resolution attorney you can find to help you navigate the sea of paperwork and filing requirements.

Determinations That Allow Tax Discharge.

The Law allows certain tax debts to be discharged in Chapter 7 Bankruptcy. In most instances Chapter 7 is where you will find the most and often the only allowances for the elimination of tax debt. The discharge of any tax is determined according to several different factors including the type of tax, how old the tax debt is, if the debtor filed a return, and the type of bankruptcy.

Federal income taxes in Chapter 7 are dischargeable if all of the following conditions have been met:

  • If you filed a tax return for the relevant tax years at least two years before filing for bankruptcy.

  • If the tax debt is from a tax return that was originally due at least three years before filing for bankruptcy.

  • If The IRS assessed the tax debt at least 240 days before the debtor filed for bankruptcy. If the IRS suspended collection activity during negotiation, the applicable date may be extended.

  • If you did not commit willful tax evasion. Possible evasive actions include changing your Social Security number, your name,

  • If the discharge is for income taxes. Payroll taxes and penalties for fraud are not eligible for discharge.

Taxes That Cannot Be Eliminated in Chapter 7 Bankruptcy.

If you have tax debts from unfiled tax returns, you will not be able to eliminate this debt through bankruptcy. In addition, Trust Fund taxes or withholding taxes from an employee’s paycheck do not qualify for elimination under bankruptcy law.

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