For those owing significant taxes, bankruptcy may offer some limited relief.

The process of discharging tax debt through bankruptcy is particularly complex, so we recommend you seek the advice of the experienced Brownsville bankruptcy lawyers of the Law Offices of Phillipe and Associates. 

What Taxes Are Dischargeable Through Bankruptcy?

There are some limited taxes that you may be able to discharge through bankruptcy, but you will first need to meet certain requirements. The rules for what can be discharged is the same between chapters, but the requirements are slightly different.

Chapter 7

You may be able to eliminate your personal income taxes through a Chapter 7 bankruptcy. In order to be eligible, you must meet each of the following requirements for each year of the associated taxes you wish to have discharged:

  1. Only income taxes can be discharged, so attempting to discharge another type of tax, such as withholding taxes, for instance, will fail.
  2. You must wait 3 years from the date the tax return was due to discharge the associated taxes through bankruptcy. This means that, if you received an extension, the three-year wait would begin on the day the extension came due.
  3. The tax return must have been filed at least 2 years prior to when the bankruptcy case is filed.
  4. You must meet the “240-day rule.” This means your tax debt must have been assessed by the IRS within the last 240 days or must have not yet been assessed.
  5. You cannot have filed a fraudulent return or willfully attempted to avoid paying taxes.

These requirements are quite complex, and each has its own exceptions. Seeking legal assistance from a Brownsville bankruptcy lawyer before you seek to discharge your tax debt through bankruptcy may help your case be more successful.

Chapter 13

There are a few things about Chapter 13 that may make it an even better option for those seeking tax debt relief through bankruptcy. 

First, there are fewer requirements: you don’t need to prove that you filed a tax return for the associated debt. Chapter 13 might also offer some tax-related benefits even if the tax debt itself can’t be discharged. 

If you’ve been charged penalties associated with your debt, you may be able to discharge them. Filing for Chapter 13 also halts any Internal Revenue Service (IRS) efforts to assess future penalties or interest. This can save you considerably.

How Does Bankruptcy Affect a Tax Lien?

Neither Chapter 7 nor Chapter 13 will wipe out any tax liens against you. 

A tax lien is recorded against a tax debtor’s property in order to ensure that the government can collect taxes that they haven’t paid. This means that if you sell the property, the proceeds will go to the IRS. 

On the other hand, the IRS may choose to seize and sell the property in what is known as a tax levy. Sadly, even if the tax associated with the lien is discharged, the lien itself will not be.

Is Bankruptcy An Effective Form of Tax Relief?

Bankruptcy is a useful tool for tax relief in some cases. It may be able to discharge your debt or halt interest and penalties. 

However, the relief it offers is limited. To learn about how bankruptcy might be able to help you with tax debts, contact a Brownsville bankruptcy attorney.

 

If you want to learn more about the debt relief you can find with a bankruptcy filing, contact Phillippe and Associates at (956) 544-6096.

 

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