Taxes in Bankruptcy

Although the rules are implicated, the popular belief that taxes cannot be discharged in bankruptcy is incorrect. But if you want to discharge tax liabilities should secure the services of a competent bankruptcy attorney.

Tax aspects of bankruptcy are very important if you file for bankruptcy. Rules relating to taxes and bankruptcy come under the category of IRS tax collections. Taxpayers who file for bankruptcy may take advantage of the automatic stay to stop a wage garnishment or bank account levy. The automatic stay may be used to prevent the tax collector from seizing a taxpayer’s business or other property.

As a general proposition, older taxes (more than 3 years old) can be wiped out in bankruptcy; newer taxes (less than 3 years old) cannot. A debtor/employer can wipe out the employer’s portion of older, but not newer, payroll taxes. Whether state and local taxes are discharged or not, will depend upon their true nature, i.e., whether they are excise or withholding taxes. The trust fund portion of payroll taxes is generally not dischargeable. Prior to filing bankruptcy, we recommend you to have a professional tax attorney examine you tax situation.

Taxes may be discharged in bankruptcy regardless of whether you file under Chapter 7, 11, or 13. In some cases, not only taxes but also penalties and interest can be discharged. In order to qualify for a tax debt discharge through Chapters 7 & 11 bankruptcies in is necessary that:

• The tax return was due more than 3 years prior to the filing;
• The tax return has been on file for at least 2 years prior to the filing;
• The tax has been assessed for at least 240 days prior to the filing;
• The tax is not based on a fraudulent return;
• There was no willful tax evasion by the debtor.

In Chapter 13, income taxes can be wiped out if the return was due more than 3 years prior to the filing, and was assessed at least 240 days prior to the filing. In some cases, the tax may be dischargeable even if not assessed prior to the filing.

Get your taxes discharged through bankruptcy with Los Angeles Tax Attorneys!

Related content about tax bankruptcy or discharging tax in bankruptcy can also be viewed at tax related websites