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Insider’s Guide to Income Taxes in Bankruptcy

Categories: Taxes & Bankruptcy

By now you should be celebrating the end of Tax Season and you have either filed your tax returns or an extension of time, if you owe taxes.  Now that you know you owe the IRS, what are your options and how do you deal with the IRS? Well, that depends on a lot of different things and who you talk to.

One colleage, Nick Gebelt wrote on a niche topic, Discharging Taxes After a Substitute For Return is Filed. I have previously written on income taxes and the requirements to discharge them in a bankruptcy case here. My favorite article is here.

There are five conditions for discharging what the debtor owes to the IRS:

The Five Conditions are:

  1. The due date for filing the tax return was not less than three years ago
  2. The tax return was filed at least two years ago
  3. The tax assessment is at least 240 days old
  4. The tax return was not fraudulent
  5. The tax payor is not guilty of tax evasion

If the debtor meets the qualifications, then the tax liability is not a priority and is discharged in bankruptcy; 11 U.S.C. 523(a)(1).  Unsecured taxes that are deemed a priority, fall outside the scope of the conditions discussed by Mr. Greifendorf and cannot be discharged in bankruptcy.

Timing is a critical component in deciding to file for bankruptcy protection and the advice of a bankruptcy attorney will address this issue.  Best practices include filing all tax returns prior to filing a bankruptcy petition with the court.  Seek the advice of a CPA or tax attorney regarding IRS claims as well.

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