tax levy

What is a Tax Debt?

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A tax debt is associated with one’s inability to pay taxes to the government, be it federal or state, on earned income. The United States government takes unpaid tax debt very seriously, and potential penalties can range from wage garnishing to property liens to jail time. Fortunately, the IRS may allow you to utilize a payment plan to pay off the outstanding debt. This is where a bankruptcy petition comes in.

Qualifying for Discharge

When it comes to eliminating tax debts in bankruptcy, it is important to take the right approach. For instance, Chapter 7 bankruptcy allows the discharge of certain “allowable” debts, whereas Chapter 13 offers a repayment plan that eliminates certain debts while others are discharged altogether.

Chapter 7 is typically the better option for discharging tax debts. However, one must first qualify for this type of bankruptcy petition, and then meet a separate set of requirements regarding tax debt.

Five Rules to Discharge Tax Debts

In order to be eligible for tax debt discharge with your bankruptcy petition, an income tax debt situation must meet the following 5 rules:

  1. The debt must be associated with a tax return that was due at least 3 years prior to the bankruptcy petition, including extensions.
  2. The tax return must have been filed at least 2 years ago.
  3. The IRS must have assessed the tax at least 240 days prior to the bankruptcy petition.
  4. The tax return must not have been fraudulent or frivolous.
  5. The taxpayer was never convicted of tax evasion.

Tax Debt Not Eligible for Discharge

Tax debts associated with unfiled tax returns are not eligible for discharge unless the taxpayer files a return for the given year. Furthermore, tax liens that had been placed on a property before you file for bankruptcy are not dischargeable, and neither are taxes that are not associated with earned income – such as fraud penalties or payroll taxes.

Contact Sheppard Law Offices Today

With the high taxes and complex tax laws in the United States today, it can be difficult to determine when you can discharge a tax debt. If you seek professional assistance, please do not hesitate to contact attorney Kenneth L. Sheppard, Jr. from Sheppard Law Offices today!