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Discharge of Income Tax Liability in Bankruptcy

Discharge of Income Tax Liability in Bankruptcy

INCOME TAX AND BANKRUPTCY

There is not a simple answer to whether or not income tax liability is dischargeable in a bankruptcy.  Under the right facts and circumstances income taxes can be discharged.

First, if a return was never filed for the taxes prior to filing for bankruptcy, then the taxes are for sure non-dischargeable under Section 523(a)(1)(B)(i) of the Bankruptcy Code.

Also, if the taxes are associated with a return that was filed within two years of a bankruptcy, then the taxes are non-dischargeable under 523(a)(1)(B)(ii) of the Bankruptcy Code.

For illustration, if the Debtor owes income taxes for the tax year ending 2006, but does not file the return until 15 months prior to the filing of the bankruptcy petition on January 1, 2011, then any taxes owed would be non-dischargeable.

If the Internal Revenue Service files a federal tax lien on the income tax liability that is due, then they have a secured clam in any bankruptcy and the lien survives the bankruptcy to the extent there is collateral to secure the lien.

To determine if taxes owed that don’t fall into the above categories are dischargeable, Section 523 must be read in conjunction with Section 507 of the Bankruptcy Code.

Section 507 would make any tax liability non-dischargeable if the taxes are associated with a return that was due, including extensions, less than three years prior to the filing of the bankruptcy petition.

As always, any opinions expressed on this website are just that, opinions. So if you have a question regarding bankruptcy or debt relief, then please give me a call to discuss your individual situation.  Bankruptcy, as many other areas of the law, can be very case or fact specific.  I pride myself on giving you the answers to your questions that are based on your individual circumstances.

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