Yes. Income tax debts can be discharged in either Chapter 7 or Chapter 13 bankruptcy. The Bankruptcy Code requires that income taxes: (1) came due at least three years prior to filing for bankruptcy, (2) had a return filed at least two years prior to filing for bankruptcy, and (3) the tax be assessed at least 240 days prior to filing for bankruptcy. There is also a limitation that the consumer not be accused of fraud by the IRS, but this is rare, and does not apply to the situation where the taxpayer made an honest mistake. I rarely see accusations of fraud when helping consumers with tax debt problems as an Asheville bankruptcy lawyer. Here’s a more common example:
Joe Smith has an income tax debt owed to the IRS from 2012 for $10,000. He filed his return on June 15, 2013. The IRS audited his return and assessed additional taxes for $5,000 on January 1, 2014.
In the example above, Mr. Smith would need to wait until April 16, 2016 to file for bankruptcy for his 2012 taxes to be non-priority, or dischargeable, in a Chapter 7 case. If Mr. Smith filed for Chapter 7 relief on April 14, 2016, all $15,000 of taxes would still be owed to the IRS since the 2012 income tax filing deadline was April 15, 2013. If Mr. Smith filed for Chapter 7 relief on April 16, 2016, all $15,000 of tax debt would be discharged.
The Dates Matter
As you can see in the example above, the specific dates matter a great deal when attempting to discharge income tax debts. Consumers should not rely on their memories for when they filed their return, when a tax was assessed, etc. Instead, it is important to order an “account transcript” from the IRS which will list the relevant dates from the IRS’ own records. You can also order state income tax transcripts from the North Carolina Department of Revenue (or whatever state the tax is owed to).
A consumer can order a hard copy account transcript from the IRS by following this link: http://www.irs.gov/Individuals/Order-a-Transcript. A taxpayer can also order the transcript by phone at 1-800-908-9946, online, or by using IRS Form 4506T. Usually, the IRS takes about 2 weeks to process a request. Note that you want an “account transcript,” and this is not the same as a “tax return transcript.” A “tax return transcript” will not have all the information you need.
As you can see, the rules surrounding tax debts are complicated and full of nuance. Its best to seek professional advice about your relief options. If you are struggling with income tax debt, and live in Western North Carolina, I would be pleased to speak with you during a free, initial bankruptcy consultation.
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