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We usually think of credit cards and medical bills as the leading culprits behind consumer debt. However, many Californians struggle with an additional source of financial hardship: taxes owed to the IRS. While tax payments can seem overwhelming, the good news is that it may be possible to discharge (eliminate) certain tax debts by filing for Chapter 13 bankruptcy. However, in order to be dischargeable, tax-related debts need to meet specific requirements. Keep reading to hear these requirements explained by Roseville bankruptcy attorneys, and learn when you can discharge tax debt in Chapter 13 in California.

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Can You File Bankruptcy on Back Taxes Owed to the IRS?

At The Bankruptcy Group, our Roseville Chapter 13 lawyers are often contacted by Californians wo have questions and concerns about tax-related debt. Some of the most common questions we receive from potential clients include, “Does bankruptcy clear IRS debt?” and, “Can back taxes be wiped out in bankruptcy?”

The answer is maybe, depending on the circumstances surrounding the debt. Factors like the type of tax that gave rise to the debt, the age of the debt, and when the tax was assessed all have an impact. If the tax debt meets certain criteria, which are explained in detail in the next section, it may be dischargeable not only in Chapter 13 (reorganization), but also in Chapter 7 (liquidation). Together, these are the two most common types of personal bankruptcy in California.

If a debt is dischargeable, it means the debtor will no longer liable for the debt once his or her case is discharged by the bankruptcy court. If a tax debt is discharged, the IRS cannot come after the filer to collect the debt, as bankruptcy court rulings supersede determinations made by tax authorities. (Note that for Californians in the Sacramento area, “bankruptcy court” generally refers to the Sacramento Division of the U.S. Bankruptcy Court for the Eastern District of California, which serves Sacramento and Placer Counties.)

Continue reading to find out when tax-related debts are dischargeable in Chapter 13 bankruptcy. Other examples of dischargeable debts in California bankruptcy cases generally include, but are not limited to, debts associated with:

  • Business Loans
  • Credit Card Bills
  • Medical Bills
  • Personal Loans
  • Utility Bills

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When is Tax Debt Dischargeable?

The only type of dischargeable tax debt is income tax debt. Generally speaking, debts arising from other tax obligations – for instance, payroll taxes – are considered to be non-dischargeable priority debts.

A priority debt is a debt that takes precedence in a bankruptcy case, even if it is not secured by collateral like a secured debt (such as a home mortgage). In Chapter 13, debtors are generally required to pay priority debts in full, in monthly installments, over the life of their three- to five-year reorganization plan.

However, there may be some cases where a Chapter 13 debtor can discharge federal income tax debt by filing for bankruptcy. In order for income tax debt to be dischargeable, the debt (and debtor) must meet certain requirements. These requirements are that:

  1. The taxpayer did not commit fraud, tax evasion, or other tax crimes. Fraudulent acts may result in dismissal of the bankruptcy case, and potentially, criminal prosecution.
  2. The debtor filed the relevant income tax return a minimum of two years before the bankruptcy filing date. Special rules apply for late returns, so a bankruptcy petitioner should consult with a Folsom Chapter 13 bankruptcy lawyer if he or she missed the tax filing deadline.
  3. The relevant tax return was due a minimum of three years before the bankruptcy filing date.
  4. One of the following statements must be true:
    • The IRS tax assessed the tax a minimum of 240 days before the bankruptcy filing date.
    • The IRS did not assess the tax.

CA Bankruptcy Attorneys Serving Roseville and Sacramento

It is very difficult for taxpayers to successfully navigate the highly technical regulations governing bankruptcy and taxes. It is not in your best interests to file bankruptcy without assistance from a bankruptcy lawyer, especially if you are concerned about IRS liabilities. Without the benefit of a Chapter 13 attorney’s extensive experience applying bankruptcy law in California, you are likely to miss key details that could make an enormous financial difference. In the worst-case scenario, you could even make errors that lead to the dismissal of your case, leaving you few remedies to eliminate or mitigate your tax liabilities and other debts.

If you are worried about paying back taxes and income tax-related debt, you are urged to speak with a Folsom bankruptcy attorney concerning your legal options. For a free and confidential consultation, contact The Bankruptcy Group at (800) 920-5351 today.