THE question that has beleaguered (and still beleaguers) too many in the past: Can federal and state taxes owed be discharged in a bankruptcy proceeding? Finally, my own research might shed light to those still wondering.
There are several guidelines, imposed by the IRS, which would allow an individual to include and discharge debts in bankruptcy. IRS Publication 908, Bankruptcy Tax Guide, is probably the best resource available out there for people who are insolvent.
The conditions set forth by the IRS include:
The taxes owed should be more than 3 years prior to the filing of the Bankruptcy case. For example, if you file Chapter 7 in August 2010, the income taxes you could discharge would include ones for tax year 2006 and earlier (tax years 2007, 2008, and 2009 would still need to be paid).
The tax return must have been filed 2 years prior to filing bankruptcy. Why so? This applies in situations where you might have filed later than the “Due Date”, which is April 15th the tax year. For example, you filed your 2006 income tax return in February 2007. That would still be considered eligible, if other conditions are met. “Filed” means when the IRS actually received the return and you filed the return. It does not qualify if the IRS actually filed the return for you.
3. The IRS or the state must have assessed the tax debt at least 240 days before the filing of the bankruptcy case. The 240-day period is extended during the time an offer in compromise is pending, plus 30 days.
4. No fraudulent activity or intent and the debtor did not engage in any willful act of tax evasion. Some examples of fraud or willful evasion include concealing or transferring valuable assets, selling assets to friends or family members for less than the fair market value and losing, concealing or destroying financial documents.
A Chapter 7 discharge wipes out the obligation to pay the taxes. However, a tax lien which has been placed and recorded prior to filing bankruptcy remains in effect. Additionally, ownership of assets beyond what would have been allowed in the exemptions would be considered stumbling blocks for individuals filing Chapter 7 because they could still be subject to tax liens.
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Evangeline is a California registered tax preparer, a legal document assistant for the general public, and a freelance paralegal offering assistance to various attorneys. She can be reached at her office at 2451 Colorado Blvd. #2, Eagle Rock, CA 90041 or at her marketing location inside the Eagle Rock Plaza. Her phone number is (323) 550-1869 or you can check her website at: www.evangelinegiron.net. She is a member of the court-endorsed California Association of Legal Document Assistant (CALDA) and an Associate Member (Non-attorney) of the LA County Bar Association (LACBA).
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Note: Evangeline is not an attorney nor does she provide legal advice. She is a bonded and registered Legal Document Assistant and prepares legal documents per the specific direction of clients.
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