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Eliminating Taxes in Bankruptcy

Posted on Thursday (October 22, 2009) at 8:00 am to Benefits of Bankruptcy
Chapter 7 Bankruptcy
Tax and Bankruptcy Issues

Some income taxes can be eliminated and discharged in personal bankruptcy filingsWritten by Craig D. Robins, Esq.
Can You Discharge Taxes in Bankruptcy?
Some taxes can be discharged in a personal bankruptcy filing.  The most common type of tax that consumers owe is back income taxes.  In certain circumstances, they can be discharged.  Most other types of taxes cannot be eliminated in bankruptcy.
What Taxes Are Dischargeable In Chapter 7 Bankruptcy?

There is a multi-prong test for determining whether income taxes can be eliminated in a personal bankruptcy filing and this test is rather detailed and complicated.
First Prong:  More than three years must have elapsed from the date that the tax return was “last due”.  Assuming that no extension request was filed, the income tax is “last due” on April 15th of the following year.  It does not matter that you may have filed the tax return a month earlier; the three-year  period starts running from the date the return was due — in this case April 15.  Extension requests have to be incorporated into the “last due” calculation as well.
Second Prong:  The tax return must have been actually filed at least two years prior to the date the bankruptcy petition is filed.  Thus, even if more than three years elapsed from the date the return was “last due”, there must be at least two years that elapsed since the date the return was actually filed, before the bankruptcy petition can be filed.
Third Prong:  More than 240 days must have elapsed since the date that the IRS “assessed” the tax obligation.  Tax assessments are tricky and IRS records and transcripts should be reviewed  to determine tax assessment dates.
Other Issues to Consider:  The IRS has the right to object to efforts to discharge tax debts if they feel that the taxpayer filed fraudulent returns, willfully attempted to evade taxes, or engaged in a pattern of tax evasion.  Also note that even if you can eliminate federal tax obligations that you ow to the Internal Revenue Service, they may still have a lien on your assets if the IRS obtained a federal tax lien.  I will address this issue in a future post.
How Do You Eliminate Taxes in a Bankruptcy Proceeding?
It is generally necessary to obtain a determination from the bankruptcy court.  This, unfortunately, can be more involved than the bankruptcy itself, as it often entails actually suing the IRS in an “adversary proceeding”, which is a federal lawsuit brought within the bankruptcy case, and heard before the bankruptcy court judge.  However, since tax debt is often substantial, it is usually worth the investment.  For more information on adversary proceedings, see A Primer on Adversary Proceedings .
What about Discharging New York State Taxes?
The same bankruptcy rules that apply to the IRS also apply to state tax obligations.
What Taxes Cannot Be Eliminated in Bankruptcy Filings?
Most other types of taxes cannot be discharged in a bankruptcy proceeding.  These include withholding taxes, fiduciary taxes, excise taxes, and sales taxes.  Remember, income taxes, in general, that are less than three years old, cannot be eliminated in bankruptcy.
Discharging taxes in bankruptcy can be rather complicated.  Getting advice from an experienced bankruptcy attorney who has actually brought tax dischargeability proceedings is important if you have significant tax obligations.
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Craig D. Robins, Esq. is a Long Island bankruptcy lawyer, who is focused primarily on helping individuals and families, find solutions to their debt problems. Read more »


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Craig D. Robins, Esq.
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