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Taxes and Bankruptcy

The Chapter 7 bankruptcy process fully discharges allowable debts. Chapter 13 bankruptcy helps you create payment plans to repay lessened portions of debts. Anyone with tax debts would be well-advised to consult with a New Jersey bankruptcy attorney to discuss the types of tax debt that can be discharged during the bankruptcy process.

Discharging Tax Debt

There are criteria that must be met for a tax debt to be eliminated by a bankruptcy filing.

  • The due date for filing a tax return is at least three years prior to filing for bankruptcy. For a tax debt to be eliminated by a bankruptcy filing, the tax return must have been due at least three years ago.
  • The return was filed at least two years ago. The tax return in question must have been filed at least two years before the debtor files for bankruptcy. The time is not measured by when it was due but by when the debtor filed the return.
  • The tax return was accurate. A fraudulent return will not be considered.
  • The debtor must not have been convicted for tax evasion. The taxpayer must not be guilty of evading the tax laws.
  • The tax assessment must be 240 days old. At least 240 days must have passed between the debtor filed for bankruptcy and the IRS assessed the tax.

Unfiled Tax Returns

Anyone who does not file a tax return will accrue penalties and debts to the IRS. A bankruptcy filing will not discharge debts that arise from not filing a tax return. The tax cannot be discharged until enough time has passed after the taxes have been filed.

Information You Will Need To Provide

Before a bankruptcy case is allowed to start, the debtor must provide the four previous tax returns. Bankruptcy petitioners are also required to have a copy of their most recent tax return. Debtors may have to provide a copy to the creditors present and to the New Jersey bankruptcy court.

Can Bankruptcy Court Decide Tax Disputes?

The bankruptcy court does have the power to decide disputes between a debtor and the IRS. If all the proper criteria are met, a Chapter 7 bankruptcy may be able to eliminate tax debts. A Chapter 13 bankruptcy may restructure the debt owed to the IRS. A bankruptcy court can often be the easiest way to determine a tax dispute. The IRS can even compromise with debtors during the repayment process. For the IRS to consider negotiating with a taxpayer, the debtor must have a “doubtful liability” (where there isn’t that much due to the IRS) or a “doubtful collection” (you do not have the money to reasonably make payments).

The Automatic Stay

Filing for bankruptcy puts an automatic stay on payments requested by creditors. This suspension of legal proceedings provides added time for a debtor to organize his or her debt and to assess the situation. An automatic stay applies to banks trying to foreclose on a home and to the IRS trying to collect tax debts.

Consulting a New Jersey Bankruptcy Attorney

The attorneys with Manchel New Jersey Bankruptcy Law understand the complexities of bankruptcy laws and how to deal with tax debt. Let our experienced New Jersey bankruptcy lawyers provide you with a free consultation. Please call us at 866-503-5655 today.