Harold Shepley writes: Many individuals accumulate income tax debt and find that it is difficult to pay off the balance that is owed. Nothing is more uncomfortable than owing the IRS money. Thankfully, some taxes can be eliminated or reduced during a bankruptcy case. Taxes are treated differently based upon the chapter under which a bankruptcy case is filed.
Chapter 7 discharges certain income taxes
The Bankruptcy Code allows you to eliminate income tax debts when the following criteria are met:
1. The Three-Year Rule: Any tax debt that originated from an obligation to pay taxes at least three years prior to the date when your case is filed.
2. The Two-Year Rule: You actually filed your tax return two years prior to filing for bankruptcy relief. Understand that a substitute tax return filed on your behalf by the IRS does not count.
3. The 240-Day Rule: The IRS completed an assessment of your taxes at least 240 days before your case was filed.
4. Income taxes only: The bankruptcy court will not discharge taxes for payroll or other tax penalties.
5. Fraud or evasion excepted: Your income tax debt will not be discharged if the court finds that you willfully attempted to evade paying your tax debt or committed fraud on your tax return.
Be aware that any tax liens that were recorded before you filed bankruptcy may survive a discharge, but only up to the amount of equity in the property.
Chapter 13 permits reorganization of tax debt
Income tax debt that meets the criteria listed above may be included in a Chapter 13 Plan. If circumstances permit, you may be capable of repaying less than the total amount of tax debt that you owe. After the Plan is filed with the court, the Chapter 13 Trustee assigned to your case will collect your monthly Plan payment that will typically last between thirty-six and sixty months.
If your tax burden is more than you can bear, consider filing for bankruptcy to relieve your burden.
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