The federal government can be one of the most persistent and demanding creditors with which a person who is struggling financially may have to deal. The government is remarkably effective in collecting money that people owe through wage and bank account garnishments, along with tax liens on property. For those already overwhelmed with consumer debt, it can seem that the burden of unpaid back income taxes are too much to bear - even if a person can manage to discharge the rest of his or her debt in a Chapter 7 bankruptcy proceeding or renegotiate payment terms with creditors in a Chapter 13 bankruptcy repayment plan.
However, many people are unaware that, under certain circumstances, they may be able to discharge their unpaid personal income taxes in either a Chapter 7 or Chapter 13 bankruptcy proceeding. A debtor may also be able to discharge any penalties for non-payment of taxes that he or she discharges in bankruptcy.
If a debtor meets five criteria, he or she may discharge some unpaid personal income tax debt in under either Chapter 7 or Chapter 13 bankruptcy proceedings. The debtor could be eligible for discharge of income tax debt if:
- The debt originates from a return due at least three years prior to the bankruptcy filing date, including any extensions
- The debtor actually filed the return at least two years prior to the bankruptcy filing date
- The I.R.S. assessed the tax at least 240 days prior to the bankruptcy filing date through a self-reported balance due, a final determination resulting from an I.R.S. audit or an I.R.S. proposed amount due that became final
- The return was not fraudulent or frivolous
- The return did not contain any information intended to allow the debtor to evade tax laws such as an intentional misspelling of the filer's name, providing an inaccurate social security number, a deliberate misstatement of income and assets, filing an incomplete return or similar actions
It is important that a person filing for bankruptcy who is looking to discharge income tax debt have filed returns for all of the years for which he or she owes taxes; if the debtor never filed a return for those years, then he or she cannot discharge the debt in bankruptcy. Along with taxes for years in which the debtor did not file a return, other types of taxes that a person cannot discharge in bankruptcy include business payroll taxes, withholding taxes that an employer should have withheld from an employee's paycheck, trust fund taxes and any penalties from unpaid taxes that a debtor may not discharge in bankruptcy.
For those who have reached a crisis point in their financial situation and need the protection of bankruptcy to help them reorganize their affairs and get a fresh start, the ability to discharge personal income tax debts in the process could be the difference between success and failure after the bankruptcy process. If you are considering bankruptcy and are wondering if you can eliminate your tax debt in the process, do not hesitate to contact an experienced bankruptcy attorney who can discuss your situation with you and advise you of your options, so that you can get the most effective debt relief possible.
