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Can bankruptcy be used to eliminate tax debt?

On Behalf of | Mar 4, 2015 | Chapter 13

While many people are preparing their taxes in anticipation of receiving a refund, there are some who are toiling in debt who are genuinely concerned about how they are going to pay their federal or state income tax bills. Chances are that these questions come up every year. It is not uncommon for people to accrue tax debt for multiple years, only to have it catch up with them. When this happens, they may be subject to liens and garnishments that make their financial situation worse.

In these situations, people with tax debt may wonder if they may be eligible to shed their debt through bankruptcy.

Tax debt is generally considered to be “non-dischargeable debt,” which means that it normally cannot be eliminated in bankruptcy unless it satisfies certain exceptions. First, tax debt must be at least three years old. For example, unpaid debt originating from the 2012 tax year or earlier could be discharged. Second, the debt must be based on a legitimate tax return. If the debt is based on a falsified tax return, especially debt in the form of penalties and interest, it cannot be discharged. Third, the taxes must have been assessed at least 240 days before the filing of a bankruptcy petition.

It may be difficult to determine if your tax debt is eligible for discharge. As such, a conversation with a bankruptcy attorney could be beneficial in giving you a reasonable opportunity to pay back taxes, or to have them discharged altogether. With the tax deadline coming soon, it may be worth discussing your situation with an attorney.