Bankruptcy has limits on discharge of federal income taxes
The inability to pay taxes is one of the problems that many people experience as they prepare to file bankruptcy. As a result, the tax bill keeps growing and becomes another significant debt added to others that are owed.
While there are conditions under which taxes may be included in the court action, debtors need to be clear about what the U.S. Bankruptcy Court will allow them to discharge when the case is completed.
Georgia attorney Jonathan Ginsberg writes on the BKBlog that several conditions must be met by the debtor for a discharge of federal taxes. In Chapter 7, the taxes due must be more than three years old and must have been assessed on prior returns at least 240 days before the bankruptcy was filed. The court also requires that the debtor must not have filed a fraudulent tax return or tried to evade paying taxes.
In addition, tax debt will be considered by the court only if the Internal Revenue Service (IRS) hasn't yet filed a tax lien on the debtor's assets. While the discharge will prevent the IRS from garnishing debtors' wages or attaching their bank accounts, any tax liens that are on the property at the time of filing bankruptcy will have to be paid when the property is sold. In some cases, the government may be able to seize property to collect the discharged tax debt.
Under Chapter 13, federal tax debts are included in monthly payments to the IRS as part of the debtor's court-ordered repayment plan.
Writing in the Florida Bar Journal, attorney Larry Heinkel advised debtors that attempting to have a tax debt discharged in a bankruptcy is generally more beneficial than agreeing to an IRS plan called "offer in compromise," which will require payments to be made for an extended period.
In all bankruptcy cases, Ginsberg warns debtors to be up to date on their tax returns for the four years prior to their court filing because they will be required among the documents to be submitted with the petition.
For Chapter 13 filers, it's especially important that tax returns including amendments be sent to the court before the 341 meeting of creditors takes place in front of a bankruptcy trustee. Not doing so could disrupt the process because many trustees will not schedule the 341 meeting if a tax return is missing.
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