Tax Debt—When are Taxes Dischargeable?

If you owe money to the IRS, consulting with a top-rated attorney in debt strategy can relieve worry. Most people are under the false impression that tax debts are never dischargeable in bankruptcy. The truth is, it is possible for some taxes to be discharged when filing Chapter 7, Chapter 11 or Chapter 13. But figuring out which taxes can be discharged is not always easy. Parker & DuFresne can help you determine which taxes you’ll still need to repay and which are dischargeable in bankruptcy. Here are some things to consider.

Discharging Federal Income Taxes—Timing is Key.

Determining whether your income taxes are dischargeable or not is often all in the timing. There are specific time frames established by the Bankruptcy Code. They are known as the three-year, two-year and 240-day rules.

These rules state that you can discharge income taxes that became due three years before you file for bankruptcy if it has been at least two years since you filed the tax forms and 240 days since the taxes were assessed. You must also meet the following requirements:

  • Discharge must be for income taxes, not payroll taxes or penalties due to fraud.
  • You did not commit willful tax evasion.
  • You did not commit tax fraud.

Penalties on taxes that are discharged are also eligible for discharge. After the discharge of tax liability, you’re no longer responsible for paying the taxes.

Taxes Associated with Debts Discharged in Bankruptcy.

You’re generally not required to pay taxes on debt that has been discharged after filing bankruptcy. Once you’ve received your discharge, you should not be responsible the taxes associated with these debts.

You may receive a 1099-C form from the IRS after filing for bankruptcy. This form should be completed and filed with your next tax return, advising the IRS that the debt in question was discharged in bankruptcy. US bankruptcy code allows for this exception since those filing for bankruptcy are under financial hardship.

Taxes Related to Debts Forgiven Outside of Bankruptcy.

Debt that a commercial lender forgives or cancels may still be taxed. You may have to include the cancelled amount of that debt as income when filing your taxes. The debt or loan is not subject to being taxed while it is being payed. However, once it is cancelled it becomes treated as income by the IRS. The lender is generally required to send out a 1099-C. The unpaid portion of the loan must be reported as income by the debtor.

Federal Tax Liens and Bankruptcy

If the IRS has placed a tax lien on your property prior to your bankruptcy case, it will still remain after discharge. You must first clear the title by paying off the lien before selling the property.

Contact Parker & DuFresne to Learn More About Dischargeable Taxes

There are many other factors involved in determining which taxes are dischargeable. When taxes are not able to be discharged, there may be other possible options, such as entering an installation agreement with the IRS. The lawyers at Parker & DuFresne have decades of experience in bankruptcy law and how it applies to taxes, and can guide you through this complex process. Schedule your consultation today by calling 904-733-7766.

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