How does an Individual get Free from Taxes Through Bankruptcy?

Taxes are compulsory payments that every citizen of a country has to make to his government. However, many times, due to unforeseeable reasons, individuals cannot pay their taxes on time. At the same time, if they are hit by a financial crisis where they have to declare bankruptcy, things only seem to go bad. If you are wondering whether filing for bankruptcy will give you any respite from paying pending taxes, then there is some good news for you. Under certain clauses of the US Bankruptcy Laws, an individual can get rid of their taxes through bankruptcy. There are two possibilities than can happen under bankruptcy - either an individual is discharged of taxes or they get the time to repay the tax on a 0% interest within a time duration lasting 3-5 years.

For taxes to be discharged under bankruptcy, it is very important to understand whether the taxes fall under priority or non-priority debts. If the tax falls under a non-priority debt, then the IRS can discharge all the taxes. But if the tax falls under a priority debt then neither can Chapter 7 or Chapter 13 be used to wipe it out. But to determine whether your tax falls under the priority or non-priority debt, you have to pass through the following three steps.

Step 1

For a tax to be listed under non-priority debt, it has to be 3 or more years old from the date of filing your bankruptcy. In simple terms it means that if you are filing your tax on May 2013, the tax should be dated at least May 2011 or earlier. If you fulfill this criterion, your tax could be listed under non-priority debt but not before completing the other steps.

Step 2

For a tax to be a non-priority debt, it has to be filed at least two years before the day of filing bankruptcy. But if the tax for a particular year wasn’t filed, that tax cannot be discharged. Furthermore, it should be understood that if IRS files the tax return on behalf of the tax payer, this step will not be applicable.

Step 3

The final step that can determine your pending taxes criteria is tax assessment. Tax assessment should be done 240 days before the date of filing for bankruptcy. Though usually the tax assessment happens immediately after the tax has been filed, if there is some mistake found in the calculations by IRS, the 240-day cycle will start afresh. The assessment period (of 240 days) may be paused if you have entered a repayment plan with the IRS. This is the most difficult step as many fail to pass the 240 days tax assessment period. It is always best to consult a reputed tax attorney in your state and under the law first-hand.

Though you can get free from taxes through bankruptcy after you have passed the above mentioned three steps, the bankruptcy courts are very strict on cases of fraud and tax evasions.

This post is shared by Attorneyforbankruptcy.com, which a leading law firm of California. Here you can have detailed information on wage garnishment california law and consumer debt consolidation