Wednesday, 11 July 2012

Does Bankruptcy Cover Tax Debt

Does Bankruptcy Cover Tax Debt ?

The Internal Revenue Service is the federal government's taxing authority. The IRS assesses, collects, monitors and audits every United States resident's federal income taxes. When Congress enacted the Bankruptcy Code, it made sure to protect the government by prohibiting debtors from getting rid of their income tax debt with some exceptions.

Bankruptcy Discharge

Bankruptcy discharges an individual's liability to repay debts. A Chapter 7 case usually results in a discharge without the debtor paying anything back; a Chapter 13 case requires repayment of some debts and partial repayment of others. The discharge applies only to unsecured debts, which are debts that are not backed by property. Credit cards and medical bills are unsecured debts. Some unsecured debts, however, are nondischargeable, including certain income taxes.

Nondischargeable Debts

Section 523 of the Bankruptcy Code lists a variety of debts that you cannot discharge. The list includes child support, alimony, student loans and most income taxes. In a Chapter 7 case, nondischargeable debts survive the bankruptcy and you must continue to repay them after the case is over. In a Chapter 13 case, you must pay most nondischargeable debts in full unless the court approves special arrangements.

Nondischargeable Income Taxes

If you owe the IRS for income taxes that the IRS assessed within the past three years, you cannot discharge the taxes. You also cannot discharge income taxes that the IRS assessed on a late-filed tax return. For example, if you filed your 2003 tax return in 2007, any taxes are nondischargeable, no matter when you file bankruptcy. Similarly, if you filed your 2006 tax return on time and the IRS assessed taxes in 2007, the taxes are nondischargeable through 2010. If you filed your 2006 tax return on time but the IRS did not assess taxes until 2009, the taxes are nondischargeable through 2012. A Chapter 7 discharge will not get rid of these taxes, and you must pay these taxes in full with interest in a Chapter 13.

Dischargeable Income Taxes

You can discharge certain federal income taxes. If the IRS assessed your taxes more than three years ago and you filed your tax return on time, you can discharge the taxes in Chapter 7 and you can treat the taxes as general unsecured debts in Chapter 13. For example, if you filed your 2001 tax return on time and the IRS assessed taxes in 2002, you can discharge those taxes in a 2011 bankruptcy.

References:
- www.irs.gov
- www.uscourts.gov

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