In many cases, a debtor is still liable for tax debt after bankruptcy. There are some circumstances that can allow tax discharge to take place. Income tax debts may be eligible for discharge under Chapter 7 and Chapter 13 of the Bankruptcy Code. Filling for bankruptcy is one of the five ways a person can get out tax debt, but there are some requirements that you need to meet for discharging your taxes. Chapter 7 provides the full discharge of allowable debt while Chapter 13 provides the payment plan that will be used to repay the remainder of the debts discharged.
Under the bankruptcy laws, not all tax debts are capable of being discharged when you file for bankruptcy. There are five criteria for discharge that the bankruptcy petitioner must meet.
In chapter 7, recent income tax obligations are considered. Most of the income obligations will receive special treatment in Chapter 7 bankruptcy because they are considered as priority debts. This means in the event of payment, they will be the first ones to be considered. This is if there is a distribution made to creditors. In the event that your income tax debt is classified as priority in the bankruptcy case, you will be obligated to pay it even if you receive the discharge.
There are some requirements for discharging income Tax Debt. Below are the requirements.
The Taxes are Income-based
Income taxes are the only type of debt that Chapter 7 is capable of discharging. The taxes must be for state or federal income tax or the taxes on gross receipts. The interests on the dischargeable taxes can be discharged if the initial taxes meet the requirements needed for discharge. Penalties on the other hand, can be discharged even if the tax doesn’t meet the required standards for a discharge. If the event that led to the penalty had occurred more than three years ago, it can be discharged in bankruptcy.
The return was due at least three years ago
The taxes must be from a tax return that was supposed to be filled three years ago from the day of filing the bankruptcy. Under the Bankruptcy Code, tax returns that were not signed by the debtor are not “returns”. Therefore, the unsigned Tax Return does not meet the definition of the term return and thus it cannot be discharged in bankruptcy. If on the other hand it was signed by the debtor, then it can be discharged because it meets the definition of the term “return”
Taxes must have been filled on time or at least two years ago
This is two years from the time of filing the bankruptcy. The moment you mail the federal taxes on time, they are deemed filed. If they are mailed late, then the date they were received by the IRS is then that they will be deemed filed.
The debtor is eligible under the 240-day rule
The tax authority must have assessed the taxes against you not less than 240 days before you filed for bankruptcy. The limit can be extended if the tax authority were restitched by the law to make the assessment. This can especially happen if you had made an Offer in Compromise to the IRS or if you were in a prior bankruptcy.
The debtor did not commit fraud
The tax returns were not fraudulent and have any intention of evading the tax laws. For people who filed joint returns, the tax authority must prove that both of the partners committed a fraudulent act to avoid paying taxes.
Once the above requirements have been met, then you can get a discharge.
Houston bankruptcy attorney William K Vaughn, at the William K Vaughn Law Firm specializes in Texas bankruptcy. We serve the following metro Houston, Texas counties of Harris County, Montgomery County, Fort Bend County, Brazoria County and Galveston County. Make a Fresh start today. We offer a complimentary initial consultation to discuss the specifics of your income tax situation or how bankruptcy can help. Call us today at 713-568-2762 or visit our website at www.wkvlawfirm.com