Can Overdue Taxes Ever Be Discharged In A Bankruptcy?


Sometimes, bankruptcy filings can release or discharge taxes. In general, income taxes older than 10 years can be discharged. However, other taxes may not be possible to discharge.

What Conditions Must Be Met To Have Taxes Discharged?

To be tax debt dischargeable, it must first be income tax debt. Second, it must follow a set of rules. These rules are the three-year rule, two-year rule, and the 240-day rule.

What Is The 240-Day Rule?

The 240-day rule states that tax must be assessed no less than 240 days before it can be dischargeable. The date of assessment is usually the 15th of April is when taxes are due.

Can Someone Have Both State And Federal Taxes Discharged In A Bankruptcy?

We are fortunate that most of our clients in the Middle District are not subject to state income taxes. However, a Florida filer or filer might have passed due to state property taxes. These are usually not dischargeable. If the requirements are met, state income taxes can also be discharged in states that have them. Federal income taxes that meet these qualifications can also be disgorged.

Are Any Delinquent Charges Dischargeable In A Bankruptcy?

If the tax returns are filed within two years and the taxes for the tax year are more than three years ago, then the bankruptcy can discharge any delinquent charges.

What Does Bankruptcy Provide For The Repayment Of Taxes That Cannot Be Discharged?

Depending on which chapter the filer submitted, a filer may be allowed to place any non-dischargeable tax into a payment plan that will allow them to catch up over time. They would then consider filing a Chapter 13 bankruptcy, which would allow up to five years’ worth of non-dischargeable tax payments.

In a Bankruptcy, Can a Tax Lien be Removed or Released?

In bankruptcy, a tax lien can be removed. Many times, bankruptcy lawyers will examine Chapter 13’s motion to determine secured status to determine if the lien is secured by equity or how much.

What Are The Differences Between Chapter 13 and Chapter 7 Bankruptcy As It Relates to Tax Debt?

In terms of tax debt, the most important difference between Chapter 13 & Chapter 7 is the way the chapters deal with the taxes you can’t get rid of. These are also known as non-dischargeable. Chapter 13 places non-dischargeable taxes into a payment plan which can be spread over five years. Chapter 7 allows you to keep the non-dischargeable tax debt with you, but it must be dealt with outside of bankruptcy.

Is Bankruptcy The Best Option for Tax Settlement?

It is impossible to say definitively that bankruptcy is the best option for tax settlement. This is a question that must be answered individually with the help of professionals. Sometimes, it’s better to deal directly with the IRS about the tax payment. Bankruptcy can often be a good option, as it gives the consumer control over the entire process.

How Will My Bankruptcy Affect Future Filings?

Indirect tax filings can be affected by bankruptcy. Bankruptcy discharges your debts. This means that the bankruptcy discharge is not considered a taxable event. This is in contrast with debt settlement and debt consolidation where the settlement company will usually issue 1099 to reduce the debt. Although bankruptcy is more effective than debt settlement for tax purposes, the filing doesn’t affect or preclude any obligation to file annual returns.

What Are Trust Fund Taxes?

Trust fund taxes are usually the money an employer would put aside to pay employee withholdings arising from wages. There is very little interaction between trust fund taxes and bankruptcy. If an employer fails to keep the money set aside for the IRS, these obligations can be repaid via bankruptcy payment plans.

What Are Some Other Options For Tax Debt?

Working directly with the IRS is another option to resolve tax debt. The IRS can often negotiate payment terms that fit within a consumer’s budget, depending on their means and ability.

The debt that is discharged in bankruptcy must be reported on income tax returns. In bankruptcy, the debt that is discharged is not income that must be reported on a tax return. The IRS doesn’t consider dischargeable debt taxable income.

This post was written by Trey Wright, a chapter 13 lawyer in Tallahassee with extensive experience! Trey is one of the founding partners of Bruner Wright, P.A. Attorneys at Law, which specializes in areas related to bankruptcy law, estate planning, and business litigation.

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