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INCOME TAXES CAN BE DISCHARGED IN BANKRUPTCY...

Imagine Life without Income Tax Debts!

A Chapter 7 and Chapter 13 general bankruptcy discharge can result in the elimination of income tax debt owed to the Internal Revenue Service (IRS), state governments, county governments, and local governments. A bankruptcy discharge would include the total elimination of all general unsecured tax debts. Also discharged would be the interest, late fees, and penalties associated with the general unsecured tax debt being discharged.

The procedure is a two-step process. First, either a Chapter 7 or Chapter 13 bankruptcy case would be filed and prosecuted until a general discharge is ordered by the court. Second, an adversary proceeding would be initiated wherein the taxpayer would sue the IRS or other governmental body by filing an adversary complaint seeking a court judgment declaring the tax debt dischargeable.

This offensive strategy must be bold, direct, aggressive, and zealous. The attorney prosecuting the case on behalf of the taxpayer must be skilled and experienced---the Schaller Law Firm suggests a minimum of 20 years of legal experience and a bare minimum of 1,500 bankruptcy cases. This is no time for "on the job training."

The Schaller Law Firm offers a FREE consultation to discuss the specifics of your case and how we can help you. You are encouraged to visit my Discharging Taxes Blog to discover more information about eliminating tax debts. You are also invited to Contact me to schedule an appointment to talk to an experienced bankruptcy attorney.

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Discharging Income Taxes: General Topics

  1. US Bankruptcy Code
  2. 6-Part Test Regarding Income Tax Dischargeability
  3. Part 1: Taxpayer filed a fraudulent tax return
  4. Part 2: Taxpayer willfully attempted to evade the payment of taxes or the government's collection of the tax debt
  5. Part 3: Taxpayer failed to file a tax return
  6. Part 4: Taxpayer filed an untimely tax return less than two (2) years before the bankruptcy case was filed
  7. Part 5: Government assessed the income tax less than 240 days before the bankruptcy case was filed
  8. Part 6: The tax return due date was less than three (3) years before the bankruptcy case was filed

US Bankruptcy Code: Discharging Taxes and the Exceptions to Discharge

Section 727(a) of the US Bankruptcy Code provides individuals filing Chapter 7 bankruptcy a general bankruptcy "discharge." The general discharge eliminates a debtor’s obligation to pay most debts that arose before the date the bankruptcy case is filed. Similarly, Section 1328 of the Bankruptcy Code provides a discharge to individuals filing Chapter 13 bankruptcy. The general discharge is granted to debtors who complete all payments under a confirmed repayment plan. The court grants each debtor a discharge of all debts provided for by the plan.

Pursuant to these Code sections, general unsecured income taxes would be discharged upon the successful completion of a Chapter 7 or Chapter 13 case and the entry of the general discharge by the bankruptcy court. Also discharged would be the interest, penalties, and late fees associated with the discharged taxes.

However, not all debts are discharged and some debts can survive the general discharge ordered by the court. Section 727(a) and Section 1328 incorporate some exceptions to this general discharge. The exceptions to discharge are setforth in Section 523 of the Code.

Section 523 of the Code identifies certain debts that are "excepted" from the general discharge, meaning that debtors would be still obligated to pay these excepted debts even though these same debtors were granted a general discharge by the court.

First, "priority" income tax debt is one category of "excepted" debt identified in Section 523. Section 523 states that a discharge entered under Section 727 or 1328 does NOT discharge an individual taxpayer from any debt relating to priority income taxes.

Second, tax debt related to unfiled income tax returns is not discharged. Third, tax debt related to "late filed" tax returns is not discharged if the return was filed within two years of the bankruptcy filing date.

Fourth, tax debt is not dischargeable if it relates to a fraudulent return. Fifth, tax debt is not dischargeable if the taxpayer willfully attempted to evade paying taxes. Finally, tax debt is not dischargeable if the taxpayer attempted to defeat the taxing body's efforts to collect the taxes.

To talk to a bankruptcy lawyer about this topic just click Find a Bankruptcy Lawyer . To return to the top of this page click Top of Page

6-Part Test: Law Relating to the Discharge of Income Taxes

Section 523 of the Code provides exceptions to the general discharge order entered pursuant to Section 727 (Chapter 7) or Section 1328 (Chapter 13). Section 523(a)(1) does not discharge a taxpayer from income tax debt if the taxpayer violates any of the following 6-part test:

The six-part test examines the taxpayer's actions---

  1. Taxpayer filed a fraudulent tax return;
  2. Taxpayer willfully attempted to evade the payment of taxes or the government's collection of the tax debt;
  3. Taxpayer failed to file a tax return;
  4. Taxpayer filed an untimely tax return less than two (2) years before the bankruptcy case was filed;
  5. Government assessed the income tax less than 240 days before the bankruptcy case was filed; and
  6. The tax return due date was less than three (3) years before the bankruptcy case was filed.

To talk to a bankruptcy lawyer about this topic just click Find a Bankruptcy Lawyer . To return to the top of this page click Top of Page

Part 1: Taxpayer filed a fraudulent tax return

The US Bankruptcy Code was drafted to help honest taxpayers who struggle paying their general unsecured income taxes. These tax debts can be eliminated and are dischargeable. The Bankruptcy Code was NOT drafted to benefit dishonest taxpayers who intentionally evade their tax obligations. The Bankruptcy Code looks with disfavor upon tax protestors and taxpayers who invent or follow dishonest tax avoidance schemes.

Taxpayers who file fraudulent tax returns are not entitled to discharge their unpaid tax obligations. Taxpayers who file fraudulent tax returns are also subject to criminal prosecution.

Below are some interesting legal cases involving taxpayers attempts to discharge income tax debt by filing bankruptcy. The cases offered on this website are removed and replaced periodically with newer cases. So I urge you to check back to this website periodically for the latest developments. However, prior cases are transferred from this webpage to my tax blog for you to retrieve. You are encouraged to view my tax blog to discover more information about eliminating income tax debts. Visit Discharging Taxes Blog or contact me to talk to an experienced bankruptcy attorney.

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To talk to a bankruptcy lawyer about this topic just click Find a Bankruptcy Lawyer . To return to the top of this page click Top of Page

Part 2: Taxpayer willfully attempted to evade the payment of taxes or the government's collection of the tax debt

The US Bankruptcy Code helps honest, but unfortunate taxpayers who cannot pay general unsecured income tax debt. Those taxpayers can discharge their tax debts. But, the Code excepts from discharge income tax debts relating to (1) taxpayers who willfully attempt to evade paying taxes, and (2) taxpayers who attempt to evade the government's collection of the tax debt.

Collier’s Bankruptcy Manual states that the act of willful tax evasion "consists of a conduct element (an attempt to evade or defeat taxes) and a mens rea requirement (willfulness). Tax evasion, [the conduct element] may be proven by a course of conduct revealing the willful concealing of assets, dealing in cash, shielding income and otherwise frustrating various tax collection efforts when the [taxpayer] clearly knows that attempts to collect the tax are being made. Nonpayment of taxes coupled with affirmative acts to avoid payment or collection of taxes can be sufficient to render the tax debt nondischargeable." Collier Bankruptcy Manual, Section 523.06(4).

The "mens rea" component requires a showing that debtor voluntarily and intentionally violated the taxpayer’s legal duties. The taxpayer needs to provide a sound rationale explaining why the taxpayer failed to pay the income taxes. The taxpayer’s inability to pay the tax obligations because of financial hardship is a significant factor in evaluating whether the taxpayer’s conduct was willful.

Below are some interesting legal cases involving taxpayers attempts to discharge income tax debt by filing bankruptcy. The cases offered on this website are removed and replaced periodically with newer cases. So I urge you to check back to this website periodically for the latest developments. However, prior cases are transferred from this webpage to my tax blog for you to retrieve. You are encouraged to view my tax blog to discover more information about eliminating income tax debts. Visit Discharging Taxes Blog or contact me to talk to an experienced bankruptcy attorney.

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To talk to a bankruptcy lawyer about this topic just click Find a Bankruptcy Lawyer . To return to the top of this page click Top of Page

Part 3: Taxpayer failed to file a tax return

This part speaks for itself! Taxpayers who fail to file a tax return are not allowed to discharge income tax debts. Remember, a taxpayer's duty to "file" a tax return is independent of a taxpayer's duty to "pay" the tax debt.

Below are some interesting legal cases involving taxpayers attempts to discharge income tax debt by filing bankruptcy. The cases offered on this website are removed and replaced periodically with newer cases. So I urge you to check back to this website periodically for the latest developments. However, prior cases are transferred from this webpage to my tax blog for you to retrieve. You are encouraged to view my tax blog to discover more information about eliminating income tax debts. Visit Discharging Taxes Blog or contact me to talk to an experienced bankruptcy attorney.

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To talk to a bankruptcy lawyer about this topic just click Find a Bankruptcy Lawyer . To return to the top of this page click Top of Page

Part 4: Taxpayer filed an untimely tax return less than two (2) years before the bankruptcy case was filed

Section 523(a)(1)(B)(ii) limits the dischargeability of income taxes. That section provides that a general discharge under Section 727 and Section 1328(b) does not discharge an individual from any income tax debt relating to an untimely tax return that was filed within two years of the bankruptcy filing date.

The key to Section 523(a)(1)(B)(ii) is the word “untimely,” meaning the taxpayer filed the tax return after the “due date,” including any extensions thereto. Therefore, this section does NOT apply to tax returns that are timely filed with a taxing authority; timely filed returns are not subject to the two-year look-back period.

The date of the tax year to which the tax return relates is immaterial. If a taxpayer files a tax return after its due date, including all authorized extensions, the tax liability reflected for that year will be nondischargeable unless the return was actually filed at least two years before the filing of the bankruptcy case.

Below are some interesting legal cases involving taxpayers attempts to discharge income tax debt by filing bankruptcy. The cases offered on this website are removed and replaced periodically with newer cases. So I urge you to check back to this website periodically for the latest developments. However, prior cases are transferred from this webpage to my tax blog for you to retrieve. You are encouraged to view my tax blog to discover more information about eliminating income tax debts. Visit Discharging Taxes Blog or contact me to talk to an experienced bankruptcy attorney.

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To talk to a bankruptcy lawyer about this topic just click Find a Bankruptcy Lawyer . To return to the top of this page click Top of Page

Part 5: Government assessed the income tax less than 240 days before the bankruptcy case was filed

All income tax debt is discharged by a general discharged order entered pursuant to Section 727 (Chapter 7) or Section 1328 (Chapter 13), except those types of debt specifically excepted from discharge. Section 523 contains the exceptions to discharge. Section 523(a)(1)(A) excepts from discharge any debt for a tax of the kind specified in Section 507(a)(8). This cross-reference to Section 507(a)(8) excepts from discharge the unsecured priority claims of a governmental taxing authority.

So, priority tax claims are not discharged. But, what is a priority tax claim? A tax claim is granted priority status if the taxpayer violates either (1) the "3-year priority look-back period," or (2) the "240-day assessment period." The 3-year priority look-back period is discussed in the next webpage section. The 240-day assessment period is described in the paragraph below.

240-day assessment period: Section 507(a)(8)(A)(ii) designates a tax claim as a "priority" tax claim for unpaid income taxes assessed by the taxing authority within 240 days before the date of the filing of the bankruptcy case. This provision is commonly called the "240-day assessment period." A tax debt assessed with the 240-day period is deemed a priority tax debt and is not eliminated by the general bankruptcy discharge of Chapter 7 and Chapter 13.

Section 507(a)(8)(A)(ii)(I) provides that the 240-day assessment period is statutorily tolled for any time during which an offer in compromise with respect to that tax was pending or in effect during that 240-day period, plus 30 days. Similarly, Section 507(a)(8)(A)(ii)(II) provides that the 240-day assessment period is statutorily tolled for any time during which a stay of proceedings against collections was in effect in a prior bankruptcy case during the 240-day period, plus 90 days.

Below are some interesting legal cases involving taxpayers attempts to discharge income tax debt by filing bankruptcy. The cases offered on this website are removed and replaced periodically with newer cases. So I urge you to check back to this website periodically for the latest developments. However, prior cases are transferred from this webpage to my tax blog for you to retrieve. You are encouraged to view my tax blog to discover more information about eliminating income tax debts. Visit Discharging Taxes Blog or contact me to talk to an experienced bankruptcy attorney.

  1. tba

To talk to a bankruptcy lawyer about this topic just click Find a Bankruptcy Lawyer . To return to the top of this page click Top of Page

Part 6: The tax return due date was less than three (3) years before the bankruptcy case was filed

As discussed in the webpage section above, all income tax debt is discharged by a general discharged order entered pursuant to Section 727 (Chapter 7) or Section 1328 (Chapter 13), except those types of debt specifically excepted from discharge. Section 523 contains the exceptions to discharge. Section 523(a)(1)(A) excepts from discharge any debt for a tax of the kind specified in Section 507(a)(8). This cross-reference to Section 507(a)(8) excepts from discharge the unsecured priority claims of government units.

So, priority tax claims are not discharged. But, what is a priority tax claim? A tax claim is granted priority status if the taxpayer violates either (1) the "3-year priority look-back period" or (2) the "240-day assessment period." The 3-year priority look-back period is discussed below. The 240-day assessment period is described on this webpage in the section above.

3-year priority look-back period: Section 507(a)(8)(A)(i) designates a tax claim as a "priority" tax claim for unpaid income taxes "for which a return, if required, is last due, including extensions, after three years before the date of the filing of the petition." This provision is commonly called the "3-year priority look-back period." The Collier Bankruptcy Manual states that the "due date for the tax return, including any extension periods, is the starting point and the date of the filing of the bankruptcy petition is the end point for application" of the 3-year priority look-back period. Again, the "due date" is the key issue, not the bankruptcy case filing date.

The last sentence of the hanging paragraph of Section 507(a)(8) provides that the priority look-back time period is statutorily tolled during the pendency of any type of legally mandated collection stay under bankruptcy or nonbankruptcy law. The tolling time period has also been expanded by 90 days in addition to the number of days that collection was stayed.

Below are some interesting legal cases involving taxpayers attempts to discharge income tax debt by filing bankruptcy. The cases offered on this website are removed and replaced periodically with newer cases. So I urge you to check back to this website periodically for the latest developments. However, prior cases are transferred from this webpage to my tax blog for you to retrieve. You are encouraged to view my tax blog to discover more information about eliminating income tax debts. Visit Discharging Taxes Blog or contact me to talk to an experienced bankruptcy attorney.

  1. tba

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