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Tax Debt in Bankruptcy

The 2014 Tax season is upon us. We are here to help you if you are in need of assistance with tax debt. Many believe that tax debt, IRS debt, or Franchise Tax Board (state tax) debt is not eligible for bankruptcy relief. Bankruptcy Law Professionals is here to tell you that tax debt can be discharged in a bankruptcy filing.

A bankruptcy can help you discharge tax debt that is 3 years or older from the tax year that the debt is owed. In 2014, you can discharge tax debt from 2011. The very basic rule of thumb is that tax debt can be discharged 3 years from the actual filing date. So, if you filed your 2009 tax year in 2011, it can be discharged this year, as long as the tax debt calculation was filed by you. If the IRS or Franchise Tax Board calculated the tax debt for you and sent you a bill, you are not able to discharge the debt in bankruptcy.

The problem with discharging tax debt is usually around a calculation of your tax debt when a tax filing has not been filed. We can use an example to illustrate. Let’s say we have a client named John who has a tax filing which was not filed back in 2009. The IRS sent him a letter based on all his 1099s or W2s that the IRS received and told him that he now owes $10,000 in income tax from the year 2009 because he never filed or paid for that year. In this particular situation, John is not eligible to have the tax debt discharged in bankruptcy. The reason is because the IRS tax debt was calculated and billed by the IRS. If he were to have filed the tax filing in 2009 and just not paid it, the debt would be eligible for discharge in bankruptcy 3 years later. There is a chance that you can file your return late and still have it discharged in a bankruptcy as long as it is 3 years from the date that you filed. We can use our sample client, John, to illustrate this example.

Let’s say John has not filed his 2009 tax filing, but the IRS has not calculated a tax debt for this particular year for him yet. So, he ends up filing the 2009 tax year in 2011 which is considered a late filing by the IRS standards. So, he may owe some penalties on the 2009 tax year, but as long as he filed it before the IRS had to calculate the debt for him, he can file a bankruptcy in 2014, 3 years after the 2009 tax year was filed, and it would be able to be discharged in the bankruptcy.

For the future, even if you don’t have the money to pay the tax debt, it would be good to at least file the tax year filing so that the debt may be able to be discharged in bankruptcy 3 years later. If you forgo filing the tax year and the IRS or Franchise Tax Board calculates the tax debt for you and sends you a bill, the debt is not eligible for discharge in a bankruptcy.

Contact Bankruptcy Law Professionals for additional information on discharging tax debt. We are available at our offices in Riverside or Orange County for in-person or phone consultations. Bankruptcy Law Professionals can be reached at 855 257-7671 to schedule an appointment at any of our offices. We look forward to hearing from you. Best of luck to all of you with your tax filings in 2014. Keep checking our site for additional information on how to deal with tax debt and any other types of consumer debt.

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