Bankruptcy does allow for the discharge of some tax debts in special circumstances. Bankruptcy lawyers say that debtors have a better chance of discharging these debts if they file for a Chapter 7 bankruptcy, rather than a Chapter 13. If the debtor does get a discharge, chances are that it will be for debt from income taxes. In no circumstances are payroll taxes or penalties for fraud eligible for discharge, though these expenses can be organized into a repayment plan if this is helpful for the debtor in a Chapter 13.

In order to receive a tax debt discharge, the debtor will need to prove that he or she filed a legitimate tax return in the relevant tax years for at least two years before filing for bankruptcy. Anyone who fails to file their tax return cannot receive a discharge because they are in violation of the law. Tax liability must be at least three years old in order to be eligible for discharge. This means that you will need to show that the tax debt was due three years before you filed for bankruptcy in any circumstances.

In order to receive the tax debt discharge, the debtor will also need to prove that he or she is eligible under the 240-day rule. This means that the IRS assessed the tax debt at least 240 days before the debtor filed for bankruptcy. If the IRS suspended collection on these debts during negotiation, then the applicable due date for the 240-day rule may be extended in these circumstances. The debtor will also need to prove that he or she did not commit willful tax evasion.

This is the act of changing a Social Security number, changing a name, or the spelling of a name, or just failing to pay taxes on purpose. Also, if individuals file a blank or incomplete tax return, or withdraw cash from a bank account and hide it so that it is not added into the taxes then these are all acts of willful tax evasion. No individual who commits these serious offenses will ever be granted a tax debt discharge because this would be rewarding poor behavior.

The debtor must also evidence that he or she did not commit tax fraud in any way. This means that the debtor will need to show that his or her tax return had no information in it that was written with the intent to defraud the IRS. Penalties on taxes that are dischargeable are also eligible for the discharge, meaning that you may not need to pay these late penalties. After the discharge of tax liability, a debtor is no longer responsible for paying taxes from that year and the IRS will not have the right to garnish a debtor's wages or bank accounts.

It is important to keep in mind that a federal tax lien can override a discharge. This means that if you file for a Chapter 7 bankruptcy but the IRS places a federal lien on your property prior to the bankruptcy case, then the tax dent will not go away. It is important to pay off the lien before selling the property that it was placed on in order to avoid complications. Some debts are never dischargeable in bankruptcy.

These include any tax penalties that are tacked onto tax debts that are ineligible to be discharged, and tax debts from unfiled tax returns. Also, any trust fund taxes or withholding taxes that are withheld from an employee's paycheck by the employer cannot be discharged. A debtor who is not able to discharge a tax debt will want to explore other arrangements, such as creating a repayment plan or offering a compromise to the IRS. If you want more information about tax debts and how to eliminate them, you need a professional on your side. This process can be increasingly complicated, so hire a local bankruptcy attorney to guide you through today!