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Can I Discharge Taxes in a Chapter 7 Bankruptcy?

Individuals who have incurred debts due to unpaid tax bills have a number of options to resolve their situation. One of these options is bankruptcy. Bankruptcy is one of the most effective means of eliminating and managing debt. However, one must generally decide whether a Chapter 7 bankruptcy or a Chapter 13 bankruptcy filing is most appropriate for the situation. The bankruptcy attorneys of The Bankruptcy Group can help potential clients understand and make a number of decisions relating to bankruptcy.

If the individual should decide that Chapter 7 is his or her best option to get out of debt, his or her unpaid tax obligations may also be able to be handled. If certain requirements are met, it is possible for some taxes to be discharged in a Chapter 7 bankruptcy. The first step is to meet three mechanical rules: the three-year rule, the two-year rule, and the 240-day rule.

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What Rules Must I Satisfy to Eliminate Tax Debt through Chapter 7 Bankruptcy?

Generally speaking, there are three main rules that all must be satisfied for a person to legally eliminate tax debts through bankruptcy. These rules are:

  • The Three-Year Rule — The three-year rule is met if at least three years have passed since the due date of the tax return for the tax at issue, including extensions. However, certain acts can extend the three-year rule including prior bankruptcies, collection due process (CDP) hearings, and innocent spouse relief.
  • The Two-Year Rule — The two-year rule is met if at least two years have passed since the original tax return was filed. It is important to note that an IRS-prepared substitute for return (SFR) is not considered a filed return for this purpose, and any tax assessed in this manner will not be dischargeable. For this reason, among others, it is generally advisable to file all delinquent returns, allowing the mechanical time frames to begin to run.
  • The 240-Day Rule — The 240-day rule requires at least 240 days to elapse from the assessment of tax. This timeframe is extended by an Offer in Compromise; thus, applying for such relief may be a tactical mistake in certain circumstances.

All of these conditions must be satisfied for a tax debt to be dischargeable. Since these tests are highly complex and technical, it is wise to consult a tax and bankruptcy professional before deciding on a plan. The lawyers of The Bankruptcy Group can apply these rules to your particular situation.

Are Other Tax Debts Non-Dischargeable?

In addition to an IRS-prepared SFR, certain other taxes are non-dischargeable, including payroll taxes that are withheld from an employee’s wage, and taxes that are the result of fraud or willful attempts to evade tax. Chapter 7 bankruptcy will generally not be an effective means of addressing tax problems of this type. We can help you devise other potential solutions to tax debt of this type.

How Does Discharging Tax Debts Through Chapter 7 Affect the Means Test?

Most people are aware that the 2005 amendments to the U.S. Bankruptcy Code by the U.S. Congress introduced a means test. The means test is intended to filter out individuals who are seen as being able to repay their debt due to a high income or disposable income. One advantage to owing a large amount of tax debt is the possibility of avoiding the means test. Although most Chapter 7 debtors must qualify based on income to pass the means test, it is possible to circumvent this rigid structure if the majority of the debt owed is non-consumer debt. Consumer debt is defined as debt incurred by an individual primarily for a personal, family, or household purpose. Taxes are not within this definition, and may therefore sufficient debt of this nature may be used to bypass the means test altogether. However, this is just one of the many considerations behind a Chapter 7 filing to address tax debts.

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Work with a Sacramento Bankruptcy Attorney on a Chapter 7 Tax Bankruptcy

If you are considering a Chapter 7 bankruptcy filing to get rid of significant amounts of tax debt, you undoubtedly have many questions about the process and what to expect. The bankruptcy lawyers of The Bankruptcy Group can help you understand the decisions that are most likely to result in a favorable resolution of your concerns. Please contact The Bankruptcy Group if you are interested in the possibility of discharging your back tax liability in bankruptcy. To schedule a confidential consultation you can call the firm at 1-800-920-5351 or contact us online.

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