A large number of people have struggled with their finances since America's most recent recession began. Many have depleted their savings, had a difficult time finding employment, or extended their credit just to get by. As a result, millions of individuals and their families have filed for bankruptcy protection during the last several years to regain control of their financial situation and get a fresh start.
People who file for bankruptcy protection are allowed to discharge certain unsecured debts, such as medical bills they owe or credit card balances. However, many people are also several years behind on paying their taxes to the Internal Revenue Service. Despite the power of the IRS, it is actually possible to discharge past-due taxes by filing for either Chapter 7 or Chapter 13 bankruptcy.
Discharging Past-Due Taxes in Bankruptcy
The IRS can be one of the most difficult creditors a person deals with during his or her lifetime, due especially to its efficiency at placing liens on property or garnishing paychecks and bank accounts to get the money it is owed. However, all garnishments and harassing phone calls stop immediately once a person files for bankruptcy protection because an "automatic stay" ceases all collection activity.
Once the stay is in place, debtors can discuss with their attorney what debts might be eligible for a discharge. This discussion often includes debtor's asking about income taxes they owe on previous returns, which are eligible for discharge only if five criteria are met:
- Taxes originate from a return due at least three years prior to the date a person files for bankruptcy (including extensions)
- Return was actually filed at least two years before the bankruptcy filing date
- Tax was assessed at least 240 days before the bankruptcy filing date
- Tax return was neither fraudulent nor frivolous
- Tax return was not intended to allow the debtor to evade tax laws (inaccurate social security number or an intentional misstatement of income, etc.)
Additionally, any person who wishes to discharge tax debt in Chapter 7 or Chapter 13 bankruptcy must have filed a return for each year he or she wishes to discharge. If a return was not filed, then the debt will remain after the bankruptcy process is completed.
Consult with an experienced bankruptcy attorney if you are considering bankruptcy or if you have specific questions regarding how it may help improve your financial situation.
