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Tax Newsletter

Unpaid Income Taxes & Bankruptcy

Government income taxes may or not be dischargeable under a Chapter 7 (liquidation) bankruptcy. Income taxes are usually considered “priority unsecured debts,” and have a higher need to be paid over other unsecured debts such as doctor’s bills or credit card accounts.

However, under certain circumstances, income taxes may be dischargeable.

A 3-Year Lapse

For income taxes to be dischargeable, 3 years must lapse from the date the taxes were last due, including extensions. This due date is calculated from the date the debtor’s tax return is filed. Also, taxes assessed by the IRS are dischargeable if they were assessed 240 days (approximately 8 months) before the bankruptcy petition is filed.

Late Filing Doesn’t Count

Filing a late income tax return, or failing to file, will not trigger the beginning of this 3-year period, and the debtor may end up filing for bankruptcy too early, and, accordingly, will not be able to discharge the overdue tax.

Furthermore, if there are problems with your taxes, such as fraud or willful evasion, the IRS may oppose any attempt by to you to discharge the tax debt. Also, any income taxes assessed after you file your bankruptcy petition are not dischargeable.

Exceptions

Certain taxes are not dischargeable in bankruptcy. These taxes include:

  • Property taxes
  • Federal tax liens that are already attached to your property
  • Certain excise taxes

Evaluate Your Situation

It is important to evaluate your tax situation before you file for bankruptcy relief. It is advisable to discuss your tax history and liability with a tax or bankruptcy professional before making a final decision

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