Taxes in Bankruptcy

Many people believe that it is not possible to discharge taxes through bankruptcy. Although, there are technical rules to mind and follow, this belief is incorrect. But if you want to discharge tax liabilities should secure the services of a competent bankruptcy attorney.

Tax issues of bankruptcy consist a great importance if you file for bankruptcy. Rules relating to taxes and bankruptcy fall under the category of IRS tax collections. Filing for bankruptcy gives you the advantage of the automatic stay to stop a wage garnishment or bank account levy. The automatic stay may be used to prevent the tax collector from seizing a taxpayer’s business or other property.

Bankruptcy is the last resort for dealing with delinquent tax bills. There are two basic types of bankruptcy available to average taxpayer to discharge delinquent taxes: liquidation under Chapter 7 and wage earner plans under Chapter 13. In Chapter 7 all of bankrupt taxpayer's assets and liabilities are marshaled. All assets, except certain exempt assets, are liquidated and distributed to creditors in the manner specified by the bankruptcy code. If non-exempt assets are insufficient to pay all creditors, most of the unpaid debts are forgiven; i.e., they are discharged.

Generally, all income taxes, both Federal and State taxes, as well as penalties and interest, may be discharged if they are old enough. In the case of the income taxes, they are dischargeable in Chapter 7 if all of the following criteria are met:

• The tax is for a year for which a tax return is due more than 3 years prior to the filing of the bankruptcy petition;
• A tax return was filed more than two years prior to the filing of the bankruptcy petition;
• The tax was assessed more than 240 days prior to filing of the bankruptcy petition;
• The tax was not due to a fraudulent tax return, nor did the taxpayer attempt to evade or defeat the tax;
• The tax was not assessable at the time of the filing of the bankruptcy petition; and
• The tax was unsecured.

In Chapter 13, income taxes can be wiped out if the return was due more than 3 years prior to the filing, and was assessed at least 240 days prior to the filing. In some cases, the tax may be dischargeable even if not assessed prior to the filing.

San Diego Tax Attorneys will help you discharge tax debts through bankruptcy!

Learn about tax bankruptcy and discharge it at tax related websites