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Can I Get Rid of My Taxes in Bankruptcy?

Many people are unaware that you can discharge income taxes in bankruptcy under certain circumstances. But, first a disclaimer. I am not an attorney and under the law, cannot give legal advice. Make certain to speak to a competent bankruptcy attorney (and believe me a lot of them are not) for advice specific to your case.

So, when can taxes be discharged in bankruptcy? Generally, personal income taxes may be discharged when the taxes are at least three years old, were assessed at least 240 days prior to the bankruptcy filing and were voluntarily filed at least two years ago. If you are considering filing bankruptcy and the IRS has filed for you, (known as an SFR or Substitute for Return) consult an attorney prior to filing original returns! This is critical and must not be ignored.

What taxes cannot be discharged in bankruptcy? Income taxes less than three years old; taxes filed less than two years ago and taxes assessed less than 240 days ago will not be discharged in a chapter 7 filing. While a chapter 7 filing may not be right for you, an attorney may well recommend that you file a chapter 13 which is a payment plan.

What about payroll taxes? There are two portions which make up a payroll tax return, the trust fund which are the taxes withheld from the employees and the non-trust fund which are the taxes paid by the employer. Only the non-trust fund portion can be discharged and that is normally around 1/3 of the total tax. In addition, if you were a corporate officer and personally assessed for the Trust Fund Recovery Penalty, don't look to the bankruptcy courts for help as that is never dischargeable.

Also, even when taxes are dischargeable, it does not mean that you simply walk away from the entire tax bill. Exempt assets to which the court does not attach are still subject to a Notice of Federal Tax Lien if the IRS filed prior to the bankruptcy. Exempt assets can include equity in a home, equity in a car and accounts receivable.

It is also very important to be aware of current legislation pending in Congress. In early May, the House passed a very restrictive bankruptcy reform bill that would stop many Americans from filing chapter 7 and instead forcing them instead a chapter 13 repayment plan. The Senate has not yet taken up the bill, but the President may veto it anyway. The bill is being pushed hard by credit card companies and banks as those debts are usually wiped out in a chapter 7. While the IRS is not pushing the bill, tax liabilities will be affected greatly if the President signs it into law. Many Americans will be severely impacted and will not be able to discharge their taxes in a chapter 7. If you want to see this bill defeated, contact your Senator immediately and advise them to vote no on bankruptcy reform.

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