One tax resolution strategy is filing for bankruptcy. In bankruptcy, old tax debt in which the tax returns were filed on time may be eligible for discharge in chapter 7 and chapter 13 bankruptcy. However, there are certain requirements to qualify for both chapters. In chapter 7, an individual must generally have low income over the past 6 months, whereas in chapter 13 an individual must have sufficient ‘disposable income’ to make their chapter 13 plan payments.
To learn more about eliminating tax debt in bankruptcy call the Law Office of Jin Kim at (916) 299-9913 for a free consultation.
Eliminating Tax Debt In Bankruptcy
It’s a misconception that taxes can’t be discharged in bankruptcy. In fact, some taxes may be discharged in a bankruptcy proceeding provided that it passes the so-called five-prong test. The taxes that can be discharged will also depend on the type of bankruptcy proceeding that you’re applying for.
Requirements For Discharge
Unsecured debts are the most common type of debts discharged in bankruptcy proceedings. Tax debts are usually not included in the discharge unless the following requirements are met (the so-called five-prong test):
- The tax returns were filed more than two years before the filing of the bankruptcy petition.
- “240 Day Rule” – the IRS must have assessed the taxes at least 240 days before the bankruptcy petition was filed, or the IRS has not assessed taxes yet.
- There is no tax lien yet
- The taxes must have been due more than three years ago
- The tax debt is not the result of fraud
For the three-year requirement, the counting of the period starts on the day when the tax return was due. Most tax returns are due on April 15th. If you’re filing for bankruptcy, only the taxes for 2017 will be qualified since they were due in 2018, which is three years ago.
The kind of bankruptcy you file for will also matter. If you’re filing for a Chapter 7 bankruptcy, only old income taxes will qualify for discharge as tax debt. If there’s a business involved you may be able to get some business taxes discharged; for those which aren’t dischargeable, an installment payment plan may be set up. For a Chapter 13 bankruptcy, you’re essentially repaying all or a percentage of your debt. You may get some of your tax debts discharged, or you may be allowed to choose another form of tax resolution such as an installment payment plan.
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