Discharging Taxes in Chapter 7, the Basics

Many individuals that I consult with that have a tax liability for income tax bring to my office letters and envelopes from the IRS that are still unopened. Many simply give up or are too afraid of the IRS to even try to understand what to do with the tax liability other than simply allow the IRS to collect the amount owed with their next tax refund.

Of the individuals that I consult with many owe taxes after they liquidated all or a portion of their retirement account without holding back enough to satisfy the tax obligation or they are or were self employed.

Despite the reason for owing a tax liability Chapter 7 offers a possible solution to resolve this liability. In reviewing the taxes that alleged to be owed for a consumer my first priority is to always have a tax professional review the returns that resulted in the liability to determine if the amounts alleged are in fact owed. If the return was self-prepared or not prepared by a tax professional a portion of all of the tax may not be owed. A full review by a tax professional is always worth the time that you will pay that personal to analyze your tax situation. (We have a CPA that is in our office that we often engaged to review tax matters).

If it is determined that the tax is due and owing and the client has made the decision to file for relief under Chapter 7 of the Bankruptcy Code then the following five (5) rules for dischargeability will apply:

1. The tax in question must be over three (3) years old; dated from the most recent date the tax return was due to be filed. This will typically be April 15th of the year following the tax year. (i.e., April 15, 2009 for the 2008 tax year). Extensions will extend this time period and other circumstances may also extend the time period.

2. The tax return itself must have been filed two (2) years prior to the filing of the bankruptcy petition.

3. The tax which you are seeking to have discharged must have been assessed more that 240 days prior to the filing of the bankruptcy petition.

4. The tax return that resulted in the tax liability must not have been filed fraudulently.

5. Lastly, you must have have been guilty of a willful attempt to evade or defeat the tax.

The rules set forth above apply to both Federal and State Income Taxes.

Furthermore, penalties and interest that have accrued on the liability will be discharged if the underlying tax liability is discharged.