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Bankruptcy & Taxes

TaxesUnpaid taxes can be the source of many headaches and nightmares for individuals.  The government’s ability to track down funds and garnish wages can only add to this stress.

In most cases, some or all of your income tax debt can be eliminated through bankruptcy, depending on number of factors.  Where those taxes cannot be eliminated, you can also choose to set up a payment plan that stops penalties and potentially interest on those taxes.

Some of the basic rules to eliminating income tax are:

(1) You must have filed your returns.  Some people fail to file returns with the IRS and Franchise Tax Board.  Later, the taxing agency “assesses” the estimated tax.  In these cases, you cannot discharge any tax debt through bankruptcy, unless you pay it off in full through a reorganization plan.

(2) The taxes have to be “old” enough.  To fully eliminate income tax debt, the bankruptcy filing must be at least 3 years from the due date of the tax return.  For example, if the taxes were from 2009, the due date on that return is April 15, 2010.  However, if you filed an extension, the due date is now October 15, 2010.  You must file the bankruptcy more than 3 years from that due date.

The second rule is that the tax return must have been actually filed at least 2 years before the bankruptcy.

The last rule is that any assessment (audit) must have been more than 240 days prior to the bankruptcy.

If you have other tax debt, such as sales tax, employment withholding taxes, or property taxes, other rules apply.

If you have questions related to bankruptcy and taxes, please call the Henshaw Law Office today.