Overdue taxes can create staggering debt for Maricopa County residents, especially with the addition of ongoing penalties and interest. Many people have heard tax debts are impossible to overcome through bankruptcy. That may not be true, although that depends on several factors including the type of taxes owed.
Income taxes are dischargeable in personal bankruptcy, provided debtors meet federal bankruptcy guidelines. Those guidelines are numerous and complex. However, individuals can be freed of considerable debt if they do qualify under these rules.
Consumers often have the greatest opportunity to eliminate tax debt by filing Chapter 7 or asset liquidation bankruptcy. The discharge of tax debt is less likely in Chapter 13 bankruptcy, where debtors agree to repay debts using a court-approved plan.
When consumers talk about big tax debts, they often mean unpaid federal income taxes.
Federal income tax debt that is a minimum of three years old is dischargeable. The taxpayer’s history also must show he or she filed tax returns at least two years prior to a bankruptcy filing. In addition, an IRS tax assessment must occur at least 240 days before the bankruptcy petition is filed.
Tax debt is not dischargeable for debtors who have filed incomplete returns. A taxpayer who has repeatedly failed to pay the debt, tried to evade tax obligations or committed fraud will not be granted a tax discharge.
If you do meet the federal guidelines, a bankruptcy court can discharge income tax debt and penalties, relieving the debtor of the tax burden. However, a tax debt discharge does not erase an IRS tax lien on property acquired prior to bankruptcy. The consumer must resolve the matter by paying off the lien before the property is sold.
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