| Chapter 7 vs. Chapter 13 | | | | In order to discharge a tax debt, it must be related to a |
| The two common types of bankruptcy for individuals | | | | return that was due at least three years ago. |
| are Chapter 7 (liquidation) and Chapter 13 | | | | Therefore if you wanted to file for bankruptcy in 2010, |
| (readjustment of debts). Although each are governed | | | | then the tax debts you hope to have discharged need |
| by their own set of requirements and conditions, tax | | | | to have originated from the 2007 tax year or before. |
| debts are generally treated similarly under both | | | | This limit also includes any automatic extensions you |
| proceedings. However, the basic concepts behind | | | | may have requested, so if you got a six month |
| each bankruptcy type will dictate how the debts are | | | | extension on your return, then it will add another six |
| settled. | | | | months to your wait time before you can file for |
| In general - under Chapter 7 -if the debts meet all of | | | | bankruptcy. |
| the conditions below, then they can be discharged | | | | 3. IRS Assessed |
| during the bankruptcy proceedings, but if even one | | | | In order to have a tax debt discharged through |
| qualification is not met, then the debts will remain after | | | | bankruptcy, the IRS will need to have assessed it at |
| the bankruptcy. However - under Chapter 13 - there is | | | | least 240 days prior to you filing for bankruptcy. |
| almost always a distribution to creditors. Therefore, the | | | | 4. Income Taxes Only |
| court appointed trustee must negotiate with the IRS | | | | Unfortunately, income taxes are the only kind of tax |
| and decide on a settlement. | | | | debt that can be discharged through bankruptcy. Other |
| Qualifications for Discharge | | | | tax debts such as unpaid employer payroll taxes, and |
| Although many taxpayers are under the impression | | | | trust fund recovery penalties cannot be discharged. |
| that tax debts cannot be discharged, some actually | | | | 5. No Fraud Allowed |
| can! However, in order for tax debts to qualify to be | | | | Last but certainly not least, the income tax debt |
| discharged, they must meet a hefty list of | | | | incurred must not be related to any fraudulent activity. |
| requirements. According to bankruptcy laws, the follow | | | | If you have willfully tried to evade taxes and were |
| conditions must be met: | | | | convicted of tax evasion, then you will not be allowed |
| 1. Tax Return Filed | | | | to have your debts discharged through bankruptcy. |
| Even if you are unable to pay the taxes due, you must | | | | Tax Returns |
| still file a tax return before a tax debt can be | | | | Before your bankruptcy will be approved, you will need |
| considered for discharge. Additionally, the tax return for | | | | to provide both the judge and any creditors who |
| the tax debt that you want discharged must have | | | | request a copy of your most recent tax return. You |
| been filed at least two years prior to the bankruptcy | | | | will also need to provide the court with proof that your |
| filing, regardless of when the returns were originally | | | | four most recent tax returns have been filed with the |
| due. | | | | IRS no later than the date of the first creditors' |
| 2. 3 Years Old or Older | | | | meeting. |