BANKRUPTCY AND TAXES


      
             In these economic times many people are in serious debt and the debt can also include taxes. Everyone knows that bankruptcy can relieve most debt but they may not realize that it may also relieve some federal back taxes. First it must be only income taxes, other taxes will not be eliminated. Second, there is no tax fraud or willful evasion involved. Third you must have filed a tax return to create the debt. If you have not filed your return after a certain number of years IRS will file a substitute tax return and estimate the tax and charge you that amount until you file an actual return. Fourth you have to discharge at least two tax years.

The 3 year, 2 year, and 240 Day Rules. The bankruptcy code sets out specific time periods that determine if you can discharge your taxes. These rules can be complicated and often misunderstood so you should consult with someone who is familiar with both bankruptcy and taxes.

The 3-Year Rule. This rule states that to qualify for a discharge the tax return must have originally been due at least three years before you file for bankruptcy. This can become complicated. For example: if you filed your original 2005 and 2006 taxes on November 15, 2010 they would become eligible for discharge if all other conditions are met.

The 2-Year Rule. You must have filed your tax return at least 2 years before if you wish to include that year in the bankruptcy filing. In the example above the tax return would not qualify for discharge because the debt is not 2 years old

The 240 Day Rule. The income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet.

Bankruptcy Does not Discharge a Federal Tax Lien
Even though bankruptcy can wipe out your obligation to pay your taxes and stop the IRS from going after your bank account and wages. It will not wipe out prior recorded tax liens. Therefore it means you may have to pay the tax lien off in order to sell your property.


Comments

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