How to Discharge Taxes in an Income Tax Bankruptcy
For some, bankruptcy is the answer to all their financial problems. Contrary to popular belief, tax debt relief through bankruptcy is a possibility. This is not always true, but there are cases in which this can happen. Income tax debt is usually eligible under Chapter 13 or Chapter 7 bankruptcy. Of course, this is something that you should check into with your tax professional before you move forward. The last thing you want to do is file for bankruptcy thinking it will discharge your tax debt, and then find out differently in the near future.
Under Chapter 7 you are allowed to fully discharge allowable debts. With Chapter 13 there is a payment plan to repay some debts, while the rest of it can be discharged. Which type of bankruptcy you opt for, as well as your reason for doing so, should be discussed with a qualified professional such as a tax attorney.
So, you want to know if you can discharge your tax debt through bankruptcy? If you meet the following requirements you can take advantage of Chapter 7 bankruptcy:
1. The due date for filing the return was three or more years ago.
2. The tax assessment is more than 240 days old.
3. The tax return was filed two or more years ago, often called the “two-year rule.”
4. The tax return was not fraudulent or incorrect.
5. You are not being charged with tax evasion or trying to avoid taxes
6. You have income back taxes or tax debt and not payroll or anything else
7. Taxes from the previous year must be paid before a bankruptcy can move forward
8. You cannot pay at least $100 a month or are below your state’s median income number
Do you meet all of these requirements? If so, you should be able to discharge your tax debt through Chapter 7 bankruptcy.
With regards to a Chapter 13th bankruptcy, here are some qualifications but not all:
1. All tax returns were filed at least 4 years before filing for bankruptcy
2. Taxes are not related to a business
3. Secured debts are not greater than roughly $1 million and unsecured, no more than $337k
4. You are capable of completing credit counseling with a US Government Agency
5. Tax returns were filed 4 years prior to filing bankruptcy
If you are thinking about bankruptcy solely for avoiding paying your tax debt you may be making a big mistake because you may not meet the qualifications to do so. This should not be seen as an easy way out, but instead something that comes along with a serious financial situation. Remember, when you claim bankruptcy your credit report and score are going to be ruined. So while you may be able to avoid paying some of your debt, there are major repercussions.
With this information in mind you should be able to determine if tax debt relief through bankruptcy is right for you. There are other ways you can reduce the total amount you owe because your financial situation is grim.
Read more about an income tax bankruptcy, including the full list of qualifications needed to file for Chapter 7 or Chapter 13. Understand your alternative options to bankruptcy including IRS tax settlement, which includes subjects matters such as an Offer In Compromise, Being Declared Un-collectable, or a Partial Payment Installment Agreement to name a few.