Can I eliminate tax debt in bankruptcy?

Can I eliminate tax debt in bankruptcy?

YES. The bankruptcy law allows debtors to eliminate tax debt in bankruptcy.

HOWEVER, the debtor’s taxes must satisfy a few tests to qualify for discharge.

GENERAL RULE: The debtor must have filed his/her taxes and must not have illegally or fraudulently attempted to evade or defeat paying the taxes stemming from that tax year.  Given those basic requirements, there are three main tests that apply: the 3 year rule, the 2 year rule, and the 240 day rule.

RULE # 1: A minimum of three years must have passed from the date a return is due before the taxes due according to that return could be dischargeable.

RULE # 2: A minimum of two years must have passed from the time the return was filed to when the bankruptcy petition was filed.

RULE # 3: At least 240 days must have passed from the date the tax was “assessed” before you file your petition.

The hardest debt to discharge in the US is IRS tax debt due to the fact that IRS can object to a tax debt discharge based on the fact that the debtor technically violated one of the preceding three rules.

Additionally, the three rules can be tolled or frozen if certain things occur, such as the IRS sending the debtor an offer to compromise or the debtor sending the IRS an amended tax return. These acts could allow the IRS to object to a tax discharge.

The smartest thing to do is to contact a bankruptcy attorney and perform a complete analysis of your tax debt to determine whether you can discharge your debt tax.

If you do not have a tax return, complete the Form 4506T and request a copy of your transcript from the IRS prior to consulting with a bankruptcy attorney. The following IRS website contains Form 4506T.

Form 4506T (Request for Transcript of Return) (January 2010 Form)

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