When it comes to debt relief, one of the best methods of fixing the problem is filing for bankruptcy. Individuals and married couples can exercise the option to relieve all or part of their outstanding debts by filing for Chapter 7 bankruptcy. With Chapter 7 personal bankruptcy you can have much if not all of your unsecured debt discharged in exchange for having your non-exempt assets liquidated to pay your debt holders. However, when it comes to tax bankruptcy things are more complicated.
Tax Bankruptcy: What Cannot Be Discharged
Unfortunately, there exist a number of tax debts that are not dischargeable under any circumstances. These include but are not limited to:
- Payroll taxes
- Fraud penalties
- Sales tax
- Use tax
You will have to pay these even with a bankruptcy filing and at the conclusion of your case the IRS (federal taxes) or the State of New Jersey (state taxes) can resume collection actions against you if you haven’t paid.
What About Income Tax?
In general, income tax is also nondischargeable. However, there are circumstances in which income tax can be discharged alongside any accumulated interest and penalties. These circumstances are what is known as the 3-2-240 rule and are as follows:
- The Three Year Rule – Your taxes are three years past due and you have filed returns. Taxes newer than three years cannot be discharged.
- The Two Year Rule – You filed a tax return for the debt at least two years before the bankruptcy filing. These filings must have been done by you and not the IRS or the State of New Jersey because they were late.
- The 240 Day Rule – If the IRS or the State of New Jersey assessed your tax debts, it must have occurred 240 days before you filed for bankruptcy.
- You Did Not Commit Fraud – In order for income taxes to be dischargeable you must not have made a false tax return or purposefully evaded taxes. If you did either of these things, the debt becomes nondischargeable.
If you meet all these requirements, then the debt can be discharged. Debts that do not fall under these rules are either a priority debt or a debt secured by a tax lien. These are not dischargeable.
Help with Tax Bankruptcy
Tax debt and bankruptcy can be complicated and confusing. However, it is important that you understand your options and take the right steps to get out from under the heel of the IRS and other creditors. To have the best chance at fixing your debt situation, you need the help of reasonably priced professional bankruptcy attorneys who know the ins and outs of the system. Contact the attorneys at Schneider Freiberger today to discuss your tax bankruptcy options and get started on the path to debt freedom.
