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What is the relationship between tax debt and Chapter 7?

Last week this blog discussed the extremely narrow circumstances in which a debtor in Long Island could seek to have his or her student loans discharged through bankruptcy. Today we are going to look at tax debt. Can tax debt ever be discharged through Chapter 7 bankruptcy?

First of all, keep in mind that it is very difficult to have tax debt discharged through bankruptcy, as there are certain elements that must first be satisfied. The bankruptcy court might, within its discretion, discharge the debtor's tax debt under the following circumstances.

First, the taxes at issue must be income taxes. Other types of taxes cannot be discharged through Chapter 7 bankruptcy. Moreover, it must be shown that the debtor did not engage in any fraud and did not willfully evade paying taxes. Also, the tax debt must be three years old or older. Furthermore, the debtor must have properly filed all their income tax returns. In addition, the Internal Revenue Service must assess the income tax debt at a minimum 240 days prior to the debtor filing his or her petition for bankruptcy, or is awaiting being assessed. Again, only if all of these elements are met might a court in its discretion discharge tax debt.

All of this being said, if debtors seek a discharge of their tax debts through bankruptcy, they probably won't be audited by the IRS. After all, as many as 1.5 million people file for bankruptcy each year. It would be impractical to examine all those applications, and the IRS in general is more concerned with those who fail to file their taxes or those who commit fraud.

As you can see, not unlike the case of the discharge of student loans, this is a very specific, very narrow set of circumstances in which tax debt might be discharged through bankruptcy. This post cannot guarantee that a specific individual's tax debt, or any other type of debt, will be discharged through bankruptcy. Debtors filing for bankruptcy in Long Island should seek the legal advice they need to understand what types of debts can be discharged through the bankruptcy process and what cannot.

Source: FindLaw, "What Happens After Chapter 7 Bankruptcy?," accessed on May 9, 2016

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