First and foremost, most taxes cannot be discharged in bankruptcy.
You may have been given false hopes by advertisements that offer a way to wipe out tax debts in bankruptcy. However, it is more complicated than perceived to be. Most tax debts can’t be eliminated in bankruptcy — the fact is, you are still obligated to pay for them at the end of a Chapter 7 bankruptcy case, or you’ll have to repay them in full in a Chapter 13 bankruptcy repayment plan.
Do not be discouraged, though. There is a reprieve for your tax debt woes, if and only if your debts are eligible for a Chapter 7 bankruptcy discharge.
Conditions to Discharge a Tax Debt
Your debts for federal income taxes can be wiped out in a Chapter 7 bankruptcy if the following conditions are met:
The tax debt is income tax debt.
You may only discharge income taxes in bankruptcy. Taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy. On the other hand, it may be good to know that any interest accrued on dischargeable tax debt may be wiped out, and penalties are dischargeable even if the tax debt is not.
The tax debt is at least three years old.
In order for the tax debt to be dischargeable, the tax return must have been originally due at least three years before you filed for bankruptcy. This date includes any extensions.
There is no fraud or willful evasion.
The tax return filed must not have been fraudulent or you must not have willfully evaded paying your taxes. If you filed a fraudulent tax return, such as using a false Social Security number on your tax return, bankruptcy cannot help. Willful evasion is deliberately reporting less income than what was earned or deducting fictitious expenses and will also cost you the discharge of your income tax debt.
You pass the “240-day rule”
The income tax debt must have been assessed at least 240 days prior to filing bankruptcy. However, if the taxing authority was prohibited from making an assessment (e.g. previous bankruptcy filing or offer in compromise), then the time limit may be extended.
The tax return was filed at least two years ago.
You must have filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy. The date the return was filed is the measuring date.
If your tax debt meets the above conditions and you file for Chapter 7 bankruptcy, you are eligible for a complete discharge of the debt. On the other hand, under Chapter 13 bankruptcy, if your tax debt qualifies, you will be required to pay back some or all of the tax debt, relative to your income and assets, through a repayment plan.
Word of Caution
You can’t wipe out a federal tax lien. If your taxes are eligible for discharge in a Chapter 7 bankruptcy case, you must be aware that your tax liens recorded prior to a bankruptcy filing will not be discharged. Although a Chapter 7 bankruptcy will wipe out your personal obligation to pay the debt and prevent the IRS from going after your bank account or wages, the tax lien on your property which was recorded before you filed will still be in place. This means you are obligated to pay the tax lien so that you can sell the property.
Contact a New Martinsville Bankruptcy Attorney for Help
If you, or anyone you know, have any tax debt, you should get in touch with our experienced West Virginia bankruptcy lawyer right away. We may be able to advise you on the best legal remedy for your tax problems. Call us now at Thomas E. McIntire and Associates, L.C.