In most cases, bankruptcy does not absolve a debtor from tax liability. However, bankruptcy laws allow the discharge of such debts in limited circumstances. Debtors are more likely to get rid of tax debts in chapter 7 than in chapter 13, which requires a repayment plan. Chapter 7 allows debtors to discharge medical bills, credit card debts and, in some cases, federal tax liabilities.
Qualifying for Tax Debt Discharge
Determining whether a tax debt can be discharged depends on the tax type, the age of the debt, whether a return was filed and the chapter of bankruptcy under which the case is filed. Federal income tax can be discharged in chapter 7 if a debtor meets these conditions:
• The discharge is income-tax related. Fraud penalties and payroll taxes cannot be discharged.
• The person filed a tax return for a minimum of two years before the bankruptcy filing.
• The debt is at least three years old.
• The IRS assessed the debt 240 days before the bankruptcy filing. Suspension of collection activities can extend the deadline.
• The person did not evade taxes by filing an incomplete return, hiding cash or changing his or her Social Security number.
Penalties on dischargeable tax debts can also be discharged. After a liability is discharged, the debtor is no longer subject to wage or bank account garnishment by the IRS.
Federal Tax Liens
Even if a tax debt is discharged in chapter 7, federal tax liens remain. Therefore, the lien must be paid off to clear the property’s title before a sale. consult the Law Offices of Frank E. Turney to speak to a Bankruptcy Attorney in Baltimore for advice on overcoming a federal tax lien.
Non-Dischargeable Tax Debts
Certain tax debt types aren’t dischargeable in chapter 7 bankruptcy filings. Tax penalties from non-dischargeable debts, trust fund and withholding taxes, and debts related to unfilled tax returns cannot be erased with a bankruptcy filing.
A person unable to eliminate tax debt in chapter 7 can ask a bankruptcy attorney in Baltimore to help them make other arrangements such as an instalment agreement with the Internal Revenue Service. Alternatively, they can make an offer in compromise which will allow them to settle the tax debt for less than the total amount owed.