Bankruptcies growing, but can you discharge tax debt

Carol Forsloff -  Bankruptcies growing in the United States are reported widely, but are people able to discharge tax debt and if so how?  An attorney explains.

Right now there
are a lot of people with large medical bills who may be unemployed and
cannot pay big debts, support families and find their way into a
personally safe financial harbor.  Then they get hit with a big tax bill they can't pay.

"Bankruptcy
can be the best available option for individuals with unpaid tax debt
to relieve some or all of the financial and personal hardship caused by
owing money to the IRS," reports the law offices of Philip F. Counce, a law firm that deals with this issue.

 Counce points  five criteria for discharging tax debt.   They can be quite complex as presented by the IRS,
but these issues are explained in a more simplified fashion by Counce
to help folks understand their rights and responsibilities under the tax
laws.

The criteria include, as Count says, the following factors and considerations:


The most common tax debt consumers face is unpaid income taxes (form
1040) and its dischargeability generally depends on these factors:
- The three-year rule.
The due date for filing the tax return (including extensions) must have
been at least three years before the date the bankruptcy was filed.
- The two-year rule. The actual filing date of a late tax return must have been at least two years before the date the bankruptcy was filed.
- The 240 days rule.
The tax must have been assessed at least 240 days before the bankruptcy
was filed, exclusive of the time during which an offer in compromise
with respect to that tax was pending plus 30 days, and exclusive of any
time during which a stay of proceedings against collection was in effect
because of a bankruptcy case plus 90 days.
- No fraud or tax evasion. The taxpayer may not have filed a fraudulent tax return or have committed tax evasion or willfully attempted to evade the tax.


This reveals, as Counce points out, how timing is everything in
discharging a tax debt in bankruptcy. Filing even one day too soon can
result in the tax, penalty and interest being nondischargeable.
Extensions to file your tax return likewise extend the date you can file
a bankruptcy case and receive a discharge of otherwise dischargeable
taxes.


Counce also reminds people that not all consumers meet the requirements
to file a Chapter 7 case and sometimes Chapter 7 is inadvisable. In
these cases, most have the option of filing a Chapter 13 case instead.
This allows people to reorganize debts and provides a repayment system
without further interest or penalties.  In addition the tax repayment
can be stretched for three to five years.

Filing
any past tax returns is also important so the Chapter 13 plan can deal
with this issue.  A means test looks at tax obligations when determining
whether it is better to file for Chapter 13 or Chapter 7.


But Uncle Sam's  tax lien is not avoidable in a bankruptcy case, Counce
tells us. "This means that if the IRS placed a federal tax lien on the
taxpayer's property prior to the bankruptcy filing, then that tax lien
will remain after the bankruptcy, even if the underlying tax debt was
discharged. However, Chapter 13 bankruptcy can be used as a way to repay
the secured portion of the tax liability and protect your property from
levy and sale by the IRS," the legal  expert explains.

IRS
rules and tax laws can be cumbersome, and when anyone gets to the level
of the tax issues, it's likely time to get that lawyer.

There are also citizen resources
that simplify the explanation of some of these concerns, and in some
cases an individual can do a lot in preparation for bankruptcy.

But,
as Counce points out,  knowing you can be free of taxes under certain
conditions can be helpful for thousands of people worried about being in

debt for the rest of their lives.