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Bankruptcy basics – Is it possible to ditch your income tax debts through this option?

Posted on Monday, September 23rd, 2013 by

If you’re someone who’s considering filing bankruptcy, whether Chapter 7 or 13, this certainly means that you’ve got too much debt in accordance with your income. A fact that is mostly seen with the consumers is that they’re not only saddled with personal credit card debt but they’re also drowning up to their eyeballs in IRS debt or income tax debt. Owing money to the government is completely different from that of owing money to a bank or a lending institution. The ease with which you can discharge your high interest unsecured debts is not there when it comes to discharging your income tax debt as debt owed to the IRS can’t always be discharged. There are many debtors as well as bankruptcy attorneys who are of the opinion that bankruptcy can easily discharge IRS tax debt but this assurance is not always true. There are certain principles and facts that you need to know in order to educate yourself on this topic.

 

Getting rid of your income tax debt in Chapter 7 bankruptcy

It is possible to discharge recent income tax debt through Chapter 7 bankruptcy but you should always be aware of the fact that some other types of debts are not dischargeable. Only if you meet some qualifications and limitations, you can discharge your tax debts through Chapter 7 bankruptcy. Check out the different requirements for discharging income tax debt through a Chapter 7.

  • When the taxes that you’ve incurred are based on your income: Yes, this is a fact that income taxes are one of the kinds of debt that can be discharged through Chapter 7. The taxes require being state or federal income tax or even tax on gross receipts.
  • When you’ve filed the tax return at least 2 year ago: Before you’ve filed Chapter 7 bankruptcy, you must have filed the tax return at least 2 years ago. In order to avoid further objections from the taxing authority, you should ensure that the return is signed and mailed properly.
  • When the tax return was due 3 years ago: The income taxes should be from a return that was due for at least 3 years before you’ve filed for bankruptcy. For instance, when the taxes were disclosed in an income tax return of 2005 for which the extensions to file a tax return ended on October 15, 2006, the return due date test will only be satisfied when the bankruptcy petition is filed post October, 2009.
  • When there are no chances of fraud or willful evasion: The income tax return shouldn’t be frivolous or fraudulent and the taxpayer should also not be guilty of any kind of intentional act of evading the tax laws. In case you file joint return, the taxing authority should prove that you and your spouse has already committed an act of fraud.


Which debts are non-dischargeable through bankruptcy?

Whether it is a Chapter 13 bankruptcy or a Chapter 7, there are some non-income debts that you can’t get rid of. Have a look at the following debts that can’t be discharged through a Chapter 7 bankruptcy.

  • Tax liens: When you file a Chapter 7 bankruptcy discharge, this wipes out the personal liability to repay the tax and averts the taxing authority from chasing after your bank account or wages. The tax liens are secured taxes that are attached to your real estate property. This rule is only applicable to those liens that are recorded against your property before you file for bankruptcy.
  • Taxes which are assigned to a third-party: This includes the “trust fund” taxes like Medicare, income taxes that the employer withholds from the employees’ pay and the FICA taxes. All such taxes can’t be discharged through bankruptcy.
  • Property taxes which are current: If you’ve incurred any property tax before you’ve filed for bankruptcy, this tax is considered as non-dischargeable. However, this will only be applicable to the property taxes that will be payable within another year from filing bankruptcy. You can discharge the personal liability for the property taxes which were payable.

Therefore, if you’re considering filing bankruptcy to discharge your tax debts, you should consider the above mentioned factors. Don’t take hasty decisions while filing bankruptcy as this might boomerang in the long run.

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