Discharging Taxes in Bankruptcy

This area of the bankruptcy code is very complex and there are exceptions to every rule involved. Trust fund or 941 taxes are not dischargeable, only SOME income taxes are dischargeable. There are five basic tests to meet in order for income taxes to be dischargeable in bankruptcy, as follows:

1. The taxes became due more than three years before the bankrutpcy filing. For example, if Ted files his year 2000 tax returns on February 14, 2001, and he owes $5000, the $5000 becomes dischargeable on April 15, 2004 which is three years from the date the year 2000 taxes became due.

2. If the original tax return was filed late, the return must have been filed more than two years before the bankruptcy filing. For example, if Susan files her 2001 tax return on Oct. 20, 2002 and owes $10,000, the $10,000 becomes dischargeable on Ocgtober 20, 2004.

3.  The taxes must have been assessed more than 240 days prior to  the bankruptcy filing.

4. The tax return must not be fraudulent.

5.  The taxpayer must not be engaged in an effort to avoid taxes.

Obtaining a tax transcript can be helpful to your lawyer when he or she is making these determinations about taxes and bankruptcy. Even if you cannot discaharge taxes in bankruptcy, having your act together with taxes and knowing what you owe can help you qualitfy for a chapter 7 bankruptcy, which is generally easier than chapter 13 bankruptcy.

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