May 21st, 2011 
admin Consumers who are looking to pay off debt may be confused when it comes to debt that is caused by overdue taxes. In a bankruptcy situation, there are very specific criteria which must be met before tax debt can be considered for discharge along with other consumer debt. If you are considering filing for bankruptcy, it will be very helpful if you know what these rules are ahead of time.
Differences in Bankruptcy Types
There are two types of consumer bankruptcy, Chapter 7 and Chapter 13. In a Chapter 7 bankruptcy, all consumer debts, including eligible tax debt, are discharged and do not have to be repaid. A Chapter 13 bankruptcy acts more like a debt consolidation service in that it allows for re-negotiation of creditor terms with the intention that the consumer will repay the debts. However, there are some debts in a Chapter 13 bankruptcy which can be fully discharged.
Rules for Discharge of Tax Debt
1. The tax debt was due more than three years prior to the bankruptcy filing, including any extensions.
2. The tax debt must correspond with a return that was filed a minimum of two years before the consumer filed for bankruptcy. The two year time frame begins from the date the taxpayer actually filed their return.
3. The bill for a tax assessment is at least 240 days old. The assessment for overdue taxes imposed by the Internal Revenue Service must have been received a minimum of eight months before the consumer filed bankruptcy. The assessment can be the result of an IRS audit, a self-report made by the taxpayer or a proposed assessment for tax charges which the IRS has deemed final.
4. The taxpayer has not filed a return which is fraudulent.
5. The taxpayer is not presently guilty of tax evasion.
Special Considerations
A person filing for bankruptcy can not include any tax debt for which he or she has not filed a return. Also, before a bankruptcy discharge is granted, the petitioner must prove that tax returns were filed in each of the previous four years.
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