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Tax Debt & Bankruptcy: Not Always a Match Made in Heaven

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Eliminating tax debt through bankruptcy is not as simple the advertisements on television and the radio make it seem. Though not impossible, discharging tax debt in filing for bankruptcy must meet certain criteria. And even if some tax debt is dischargeable in bankruptcy, others are not. Let me break it down for you so you can see where you land with your current tax debt.

The following things must happen in order for you tax debt to be eligible for discharge through bankruptcy:

  1. More than three years has elapsed from your tax due date.
  2. Your tax return has been filed for more than two years.
  3. Your tax debt has been assessed for 240 days prior to filing for bankruptcy. And note that in California, if the taxpayer has received a notice of tax due, the assessment date will be sixty (60) days AFTER the date of the letter. In other words, the taxpayer must wait 300 days from the date of the letter before filing.
  4. No fraud or false returns were filed. You cannot have tried to cheat the system.

You may ask yourself why all of these time stipulations? The IRS and State of California establish these rules, so that they have the appropriate amount of time to review your assets and income in your return. They want the proper time to start their collection process before you file to discharge the debt. If you filed your return late and immediately filed for bankruptcy, they would not have the time to evaluate your income and assets.

Just like I do not recommend filing for bankruptcy on your own, I do not recommend filing your taxes independently if you are in financial difficulty. I advocate hiring a tax professional such as Ameer Khan, CPA, MSA.  He can handle all of your tax preparation and planning.

When trying to discharge tax debt in bankruptcy, filing for Chapter 7 is probably your better option. If you file for Chapter 13, tax debts that have been due for less than 3 years are paid in full minus penalties throughout the Chapter 13 repayment plan. But tax debts that are dischargeable in Chapter 7 are paid exactly like unsecured debt according to the debtor’s income. In both Chapter 7 and Chapter 13 filings, a court-ordered injunction called an automatic stay will prevent IRS or the State collection efforts or tacking on extra fees.

Tax debt discharge in bankruptcy is not black and white and that is why it is imperative you trust an expert to guide you through this process. Khan Law Offices will work with you one-on-one to find the best available solution to you financial problems–whether the answer is pursuing bankruptcy or not. I am proud to be both a legal counselor and dedicated advocate for my clients. Please click here to schedule a confidential and complimentary initial consultation.