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When can you discharge a tax debt in bankruptcy?

People often assume that if they file for bankruptcy, among the debts they won't be able to discharge is income tax debt. That's not entirely true. Under some circumstances, you may be able to do so whether you are filing Chapter 7 bankruptcy, where a person's assets are liquidated to pay their debts, or Chapter 13, which involves a multi-year payment plan.

It's important to understand that most tax debts aren't dischargeable because they're considered "priority." In Chapter 7 bankruptcy, that means that they're among the first that must be paid from the liquidated assets. In a Chapter 13 bankruptcy, priority debts must be included in the payment plan and completely paid off in the bankruptcy.

However, tax debts that meet the following criteria may be dischargeable in bankruptcy:

  • The taxes were due at least three years prior to the bankruptcy filing. This due date takes into account any extensions granted by the Internal Revenue Service (IRS).
  • The tax return in question was filed at least two years before the bankruptcy. This criterion is generally covered under the first one unless a person filed their return more than a year late.
  • The tax assessment must have been made at least 240 days before the bankruptcy filing. Again, this is generally covered under the first criterion. However, sometimes an assessment isn't levied until long after it was originally due — perhaps because of a delay in filing a tax return, for example.
  • You haven't intentionally evaded paying taxes or filed a fraudulent return. Tax debts can't be discharged if a taxpayer willfully broke any tax laws.

A court won't approve a bankruptcy filing unless a person can provide proof that they have filed their tax returns for at least the past four years. Returns must be filed at least by the time the first creditors' meeting is held. Creditors are allowed to see copies of your returns if they ask for them.

If you have questions about whether and how much of your tax debt can be discharged if you file for bankruptcy, your Tennessee bankruptcy attorney can provide answers and guidance.

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