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When Can Bankruptcy Be Used to Discharge Tax Debts?

Overdue taxes can be a huge burden for people who are trying to cope with other mounting debt. If you are considering bankruptcy, you may be able to be relieved of some or all of your tax debt, depending upon how long it has been owed.

While current tax debt is generally nondischargeable, meaning that it cannot be wiped clean through bankruptcy, income taxes from past years are eligible under the “3-2-240 rules” found in the U.S. Bankruptcy Code. The rules state the following time periods for determining whether an income tax debt can be forgiven:

  • 3 years — The original due date for your tax bill must be at least three years before you file for bankruptcy.
  • 2 years — You must have filed your tax return(s) relevant to the past-due taxes at least two years before filing for bankruptcy.
  • 240 days — The federal, state or local taxing agency must have assessed your tax debt at least 240 days before you file for bankruptcy. To assess a debt means to make a determination of what is owed. There may be delays between the time you submit your tax return and when it is assessed by the IRS. Audits and offers in compromise can also result in later dates of assessment.

An important condition of qualifying for a discharge is that you did not file a fraudulent tax return or otherwise commit tax evasion.

A discharge of income tax debt in a Chapter 7 bankruptcy includes forgiveness of interest and penalties owed, which can be substantial. However, any lien that the taxing authority has placed on any of your property is not cancelled. That means the lien must be satisfied if the property is sold.

Taxes owed by a business are treated differently under the bankruptcy code. While a sole proprietor may be able to discharge tax debt under the 3-2-240 rules, those rules do not apply to taxes for which a business entity is liable. For example, a business can be held accountable for paying back payroll taxes, though it may be able to discharge payroll taxes that are overdue by several years.

The bankruptcy lawyers at Jeff Field & Associates in Scottdale advise people throughout Georgia on their options for obtaining tax debt relief. We maintain offices throughout Metro Atlanta, including in Marietta, Douglasville, Gainesville, Lawrenceville and Athens. To schedule a free initial consultation with a member of our team, call 404-381-1278 or contact us online.

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