Bankruptcy and Tax Debt

 

Bankruptcy 

There is a common misconception that income taxes are never dischargeable in bankruptcy. In fact, you can discharge your back federal, state, and local income taxes in Chapter 7, Chapter 13, and Chapter 11. Penalties and interest are also dischargeable. Determining which back taxes are dischargeable can be a little complex. However, it is possible to discharge significant income tax debt in bankruptcy, if your tax debt fits within the following rules. 

Taxpayer Representation 

1) The 3-Year Rule. This rule states that to discharge your back income taxes, they must become due at least three years before you file for bankruptcy. 2) The 2-Year Rule. Under the 2-year rule, your income tax returns must have been filed at least two years before filing your bankruptcy petition. This requirement allows you to discharge your taxes, even if you filed your tax forms late, as long as you file them at least two years before filing for bankruptcy. 3) The 240-Day Rule. Taxes must be assessed at least 240 days before you file for bankruptcy under this rule or not assessed at all. However, if you file a correction or a change results from an IRS audit, the assessment date may be substantially later.  Although determining the dischargeability of income taxes can be a bit complex, it should not discourage you from seeking assistance. Here at Selph & Friday we evaluate all options when seeking solutions to your tax problems. If we identify bankruptcy as a possible solution we refer you to a bankruptcy attorney to determine if your federal income taxes are dischargeable in bankruptcy.