Can income taxes be discharged in a Chapter 7 bankruptcy?

Question from JT, Can income taxes be discharged in a Chapter 7 bankruptcy?

Answer from AI:

Understanding Chapter 7 Bankruptcy

Chapter 7 bankruptcy, often referred to as “liquidation bankruptcy,” allows individuals to discharge many of their debts, giving them a fresh financial start. However, not all debts are dischargeable, and income taxes fall into a special category with specific rules.

Criteria for Discharging Income Taxes

Income taxes can be discharged in a Chapter 7 bankruptcy under certain conditions. The following criteria must generally be met:

1. Three-Year Rule: The tax return must have been due at least three years before the bankruptcy filing. This includes any extensions.
2. Two-Year Rule: The tax return must have been filed at least two years before the bankruptcy filing.
3. 240-Day Rule: The tax assessment must have been made at least 240 days before the bankruptcy filing.
4. No Fraud or Willful Evasion: The tax return must not be fraudulent, and the taxpayer must not have willfully attempted to evade paying the taxes.

Exceptions and Special Considerations

Even if the above criteria are met, there are some exceptions and special considerations:

• Trust Fund Taxes: Taxes that an employer withholds from an employee’s paycheck (e.g., Social Security and Medicare taxes) are not dischargeable.
• Property Taxes: These are generally not dischargeable if they became due within one year before the bankruptcy filing.
• Penalties: Penalties related to nondischargeable taxes are also typically nondischargeable.

Steps to Determine Dischargeability

To determine if your income taxes can be discharged in a Chapter 7 bankruptcy, follow these steps:

1. Gather Tax Records: Collect all relevant tax returns and notices from the IRS or state tax authority.
2. Check Filing Dates: Verify the dates when the tax returns were due, filed, and assessed.
3. Consult a Bankruptcy Attorney: Given the complexity of tax laws and bankruptcy rules, it’s crucial to consult with a bankruptcy attorney to review your specific situation.

When to Seek Legal Advice

If you are considering filing for Chapter 7 bankruptcy and have outstanding income tax debts, it is essential to seek legal advice. A bankruptcy attorney can help you navigate the complex rules and determine whether your tax debts are dischargeable.

Additional Resources

For more information, you can refer to the following resources:

• IRS Topic No. 431 – Canceled Debt – Is It Taxable or Not?
• U.S. Courts – Chapter 7 Bankruptcy Basics

Remember, while this information provides a general overview, individual circumstances can vary significantly. Always consult with a legal professional for personalized advice.