Oddly enough, although today, you hear commercials about this on television all the time - especially if you're up late at night - many attorneys still don't understand the concept - or know how to do it properly. So, if you decide to file for a tax bankruptcy, please made certain your bankruptcy attorney has experience discharging taxes.

If not, keep looking until you find someone who does. I am fighting a case today where California state taxes weren't discharged by a Nevada attorney back in 1996-97. The balance today is over $80,000. You don't want that to happen to you.

Let me explain how this works, OK?

NO SUCH THING AS TAX BANKRUPTCY

First of all, it's true, there is no such thing as a tax bankruptcy. It's just your regular, run-of-the mill Chapter 7 filing.

However, if your tax debt fits a certain profile, you are allowed to discharge it.

Here are the conditions:

1. The tax return is for a year that is at least 3 years before you file for bankruptcy.
2. The tax return was filed more than two years before you file the bankruptcy petition.
3. The tax was assessed more than 240 days before you file the bankruptcy petition (this for audits, and additional assessments).
4. The tax didn't result from a fraudulent tax return or tax evasion. *
5. The tax was not secured against your property. In other words, no lien was filed.
6. The didn't result from a trust fund penalty for unpaid employer's payroll taxes.

* ed. better stated:
You did not commit fraud or willful evasion. You did not file a fraudulent tax return or otherwise willfully attempt to evade paying taxes, such as using a false Social Security number on your tax return. 

Meaning, if the taxpayer willfully chose the keep their money rather than sending it to the IRS to pay the taxes legitimately due, that that is considered by the IRS to be evading the payment of the tax, and therefore, under the Bankruptcy Code, non-dischargeable.

11 U.S.C. §523 Exceptions to discharge
11 U.S.C. §523(a)(1)(C)  "with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax;"

http://doney.net/bkcode/11usc0523.htm

http://www.bankruptcyaction.com/chapter13.htm

For ten years of a twelve-year period, Anyse Storey filed federal income tax returns that showed she owed taxes - but she failed to pay them. The United States brought an action to reduce to judgment Storey's tax liabilities for the ten years, and to foreclose on its tax liens placed on real property owned by Storey. Storey argued that her Chapter 7 bankruptcy petition discharged her tax liabilities for some of the years preceding the filing. The district court disagreed and entered judgment in favor of the United States, finding that Storey had willfully attempted to evade paying taxes for those years, preventing discharge of the obligations through her bankruptcy filing. Because the United States cannot carry its burden on the issue of willfulness, we REVERSE.  U.S. v. STOREY United States Court of Appeals, Sixth Circuit. Decided and Filed: May 16, 2011.

TOLLING THE STATUTE

If you talk to a bankruptcy attorney who understands about taxes and bankruptcy, you'll start hearing that phrase - tolling the statute. /font>

Last updated: March 05, 2014
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