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Law Offices of Nicholas Gebelt

Bankruptcy Tax Relief


Can IRS liabilities be discharged in bankruptcy? A common misconception is that taxes are never dischargeable. In fact, some tax liabilities are eligible to be discharged in bankruptcy, but there are complicated rules governing this area. Our board certified bankruptcy law specialist, Attorney Nicholas Gebelt, can determine whether bankruptcy tax relief is available to you.

Discharging taxes in a personal Chapter 7 bankruptcy

For a tax to be dischargeable in bankruptcy, it must satisfy three requirements:

  1. (The three-year rule) The tax return for the tax year in question must have been due (including extensions) – but not necessarily actually filed – at least three years before the filing of the bankruptcy papers,
  1. (The two-year rule) The debtor must have actually filed a legitimate, non fraudulent tax return for that tax year at least two years before the filing of the bankruptcy papers, and
  1. (The 240-day rule) The taxing authority cannot have assessed the tax during the 240 days prior to filing the bankruptcy pape

Each of these requirements is a bit complicated and can be misinterpreted. See my blog post: Discharging Income Taxes: The Importance Of Pre-bankruptcy Planning for more information.

Even if the taxes are not dischargeable, an Offer in Compromise combined with a bankruptcy may provide the best relief for a person with debt and IRS problems. Call us to discuss how filing for Chapter 7 bankruptcy may affect your tax liability.

Discharging taxes in Chapter 13 bankruptcy

Chapter 13 offers more flexibility than Chapter 7. In many cases, Chapter 13 allows interest to stop accruing.

Discharging taxes in a business bankruptcy

Some of the same rules that apply to individuals also apply to businesses. IRS liabilities are often a significant challenge to business owners—especially those owners who have not paid employment liabilities.

Payroll withholding taxes cannot be discharged in bankruptcy; however, payroll withholding taxes may be paid through a Chapter 11 plan. The non dischargeable portion of the liability can be paid over five years in Chapter 11. Filing bankruptcy often enables a business to survive and successfully reorganize its debts and IRS liabilities.

There are many exceptions to the discharge rules in bankruptcy. A careful analysis is necessary to avoid pitfalls. We can provide an honest assessment of whether you may qualify for relief.

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