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Bankruptcy and your debt to the IRS

When debt overwhelms you, it can be a scary thing. Creditors may call or even visit your home or work, and you may face many embarrassing and stressful moments as they try to collect what you owe. Perhaps no creditor is more frightening than the IRS.

The IRS has much more power to collect delinquent tax debt than most other creditors have to reclaim their past-due accounts. For example, while your credit card company must obtain a court order to garnish your wages, the IRS may simply notify you of their intentions before they begin to deduct a percentage of your pay. You may have heard that even bankruptcy will not relieve you of your tax debt, but this is not entirely true.

When does tax debt qualify for discharge?

If you have not paid your taxes for the last two years, filing for bankruptcy will probably not discharge those debts even if you file under Chapter 7. Tax debts, along with child support debt and others, receive priority, so when your bankruptcy trustee liquidates your assets, the IRS is among those who receive payment first and in full. However, under the following conditions, you may be eligible for the discharge of delinquent tax payments:

  • Your unpaid taxes are three years past due or later, including extensions.
  • You filed your returns for those late taxes at least two years before filing for bankruptcy.
  • The date of the assessment for those taxes occurs 240 days or longer before you file for bankruptcy.
  • Your tax return is valid and contains no fraudulent or frivolous information, such as making outrageous deductions or claims.
  • You are not late on your taxes because you are intentionally evading your legal obligation to pay them.

The IRS also requires that you have filed your tax returns for that past four years. It is often the case that if someone falls behind on paying taxes, they may avoid filing future returns. If this is your situation, you must file returns for the past four years before you meet with your creditors the first time. You will have to present a copy of the most recent year’s tax returns, and your creditors may want a copy as well.

If there is a chance that even a portion of your tax debt may qualify for discharge in your bankruptcy case, it may be worth it to pursue that possibility. A New York attorney who has a history of success in dealing with complex tax debt and disputes involving the IRS can be an invaluable advocate.

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