Friday, July 10, 2015

Yes, Bankruptcy Can Eliminate IRS Taxes, But…

Under the bankruptcy code, bankruptcy can be used as an IRS tax debt resolution if you meet the following criteria: you owe income taxes, you filed your returns, the returns were actually filed more than two years before the bankruptcy started (and were due for filing more than three years before the bankruptcy). Simply put, income tax debts that are at least three years old can be eliminated through bankruptcy.

In addition to these requirements, you also need to pass the “240-day rule”, wherein the result of your audit has been finalized in the IRS’ books for more than 240 days before the bankruptcy is filed.

With that in mind, bankruptcy can’t wipe out an income tax debt when the return was due for filing within the last three years, or was actually filed within the last two years. This rule applies to any form of tax debt, including employment taxes withheld from your paycheck. It doesn’t matter when the returns for this withheld tax were filed—these are considered as trust fund taxes, and cannot be removed by bankruptcy.

With respect to Chapter 7 bankruptcy, it usually won’t eliminate income taxes if the IRS was the one who filed your return for you via substitute for return (SFR).

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