have been filed on time
The filing should not be fraudulent
The tax return must have been filed over three years ago as ofthe bankruptcy filing date (e.g. IRS debts for the last threeyears generally, would not be dischargeable)
Alternatively, in some cases, if the tax return was filed late,was not fraudulent and was filed over two years ago as of thedate of the bankruptcy filing, the tax debt may be deemeddischargeable. For example, if you filed your 1986 tax returnsin 1990, and in 1994 filed a Chapter 7 Bankruptcy, this tax debtwould be dischargeable as long as it was not related to afraudulent filing and the tax debt was assessed by the IRS over240 days before the bankruptcy filing.
Even if all of the above requirements are met, personal incometaxes can still sometimes be non-dischargeable in a Chapter 7bankruptcy. This occurs when the IRS has placed a tax lien onthe debtor's property. In this case, the tax liability must bepaid in full, but the IRS may be forced to accept a payment planor substantially eliminate penalties through the filing of aChapter 13 bankruptcy.
In a Chapter 13 bankruptcy, the debtor makes payments to abankruptcy trustee and the bankruptcy trustee in turndistributes a percentage of the payment to the creditors. AChapter 13 plan is filed with the court which determines theamount distributed to each creditor by the trustee. A bankruptcyjudge can force the IRS to accept extended payments on personalincome tax liability through a Chapter 13 plan. This type ofbankruptcy works well when the IRS has a tax lien on personalproperty and the debtor has enough income to pay back the IRSover a three to five year period. Tax penalties may bedischarged in a Chapter 13 bankruptcy because they are lumped inwith all the other unsecured creditors of the debtor, such ascredit cards. These are generally only paid back through thebankruptcy at 10% or ten cents on the dollar.
Filing either a Chapter 7 or a Chapter 13 bankruptcy may be auseful tool for debtors to eliminate tax liability.
About the author:
Richard K. Gustafson, II is a partner with Legal Helpers andspecializes in consumer bankruptcy law. www.legalhelpers.com, the law firm of Macey & Aleman, is one of the nation's largestconsumer bankruptcy firms. Legal Helpers can be contacted byphone, 888-743-5787 or by email, info@LegalHelpers.com.
