Legal Question in Bankruptcy in California

Re: tax

If you mean can taxes be discharged in bankruptcy, the answer is it depends. For a basic explanation of the tax dischargeabilty issues, visit my webpage at http://www.bklaw.com/chapter7doc.htm

If you have any further questions after that, feel free to contact me.

Regards,

Mark

Re: tax

Thanks for your posting. This is a tricky question. I can answer by stating what the law states in this regard:

Income taxes more than 3 years old can be wiped out in bankruptcy; newer income taxes (less than 3 years old) cannot. The dischargeability of state and local, such as sales and use taxes, will depend upon their true nature, i.e., whether they are excise or withholding taxes.

Prior to filing bankruptcy, you should consider the following Test for Wiping Out Income Taxes--

In Chapter 7 that includes:

1. The tax return was due more than 3 years prior to the filing

2. The tax return has been on file for at least 2 years prior to the filing

3. The tax has been assessed for at least 240 days prior to the filing

4. The tax is not based on a fraudulent return; and

5. There was no willful tax evasion by the debtor.

In general, to summarize 1-5 above, you can discharge (wipe out) debts for federal income taxes in Chapter 7 bankruptcy only if all of above five conditions are true.

If you pass the three-year rule, you must also pass the two-year rule. This means you actually filed the tax return at least two years before filing the bankruptcy -- having the IRS file a substitute return for you usually doesn't count. However, in some bankruptcy courts, agreeing to and signing the substitute return counts as filing a return for purposes of this rule.

The 240-day rule (#3 above), means, that the income tax debt was assessed by the IRS at least 240 days before you file your bankruptcy petition, or has not yet been assessed.

Even if your taxes do qualify for discharge in a Chapter 7 bankruptcy case, your victory may be bittersweet. This is because prior recorded tax liens are not affected by your filing. A Chapter 7 bankruptcy will wipe out only your personal obligation to pay the debt. Any lien recorded before you file for bankruptcy remains. After your bankruptcy, the IRS can seize any property you owned at the time the bankruptcy was filed. But this doesn't mean that after your bankruptcy case is over the IRS will come and grab your property. Post-bankruptcy, the IRS tends to seize only real estate and retirement accounts or pensions. And even then, IRS seizures generally take place only when a taxpayer has made no efforts to otherwise resolve the problem.

If you cannot discharge your tax debts in a Chapter 7 bankruptcy, Chapter 13 may be a better alternative. There, you pay your tax debts over time.

In Chapter 13, income taxes can be wiped out if the return was due more than 3 years prior to the filing, and was assessed at least 240 days prior to the filing. In some cases, the tax may be dischargeable even if not assessed prior to the filing.

I hope that is clear. As I mentioned, taxes are somewhat complicated.