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Some IRS tax claims CAN be discharged in Chapter 7 Bankruptcy : Personal Service Law Firm, Bankruptcy, Family Law, Criminal Law, Personal Injury

Some IRS tax claims CAN be discharged in Chapter 7 Bankruptcy

The federal government has a public policy interest in enforcing bankruptcy law which is designed to allow debtors “a fresh start” by discharging qualified debt and allowing debtors to become financially viable members in society.  A conflicting government interest is the collection of taxes.   Tax dollars are the primary revenue source for government and clearly it is extremely motivated to ensure collection.  To resolve the inherent conflict the government has enacted exceptions to the Bankruptcy Code, 11 USC Section 523(a)(1), by assigning specific classifications to taxes and restricting their dischargability.

For purposes of the Bankruptcy Code the classifications for tax debts are: Secured tax claims, General Unsecured tax claims, Priority tax claims, Administrative  claim taxes, Trust Fund taxes, and Penalty tax claims.  Most tax debts are classified as Priority tax claims as provided in 11 U.S.C. 507(a)(8) and are non-dischargeable.  Unsecured tax claims, however, lack the Secured or Priority Claim status and are generally dischargeable in bankruptcy.   

If Priority tax claims are non-dischargeable and Unsecured tax claims may be dischargeable, the obvious question becomes - “how does one go about reclassifying an IRS tax debt from a Priority tax claim to an Unsecured tax claim?”  

In broad-stroked terms the answer is - “with filed income tax returns and the passage of time.”  Unfortunately, exceptions to dischargability are not narrowly drafted statutes, and it is definitely not as simple as that.  On the other hand, and contrary to what you may have heard, it not impossible and sometimes it is as simple as that. 

More specifically, and in layman’s terms, listed below is a brief description of what is required for the dischargability of IRS taxes in Chapter 7 Bankruptcy:

  • “The three year rule”
    Income tax returns must have been due at least three years prior to filing the bankruptcy petition.  The three year period starts when the taxes are actually due on April 15, and not the end of the calendar year.  Additionally, if an extension is granted, the due date is continued until the final day of the extension.
  • “The 240-day rule”
    Any subsequent assessments within 240 days of filing the petition remain Priority Claims and are not dischargeable. This period of time is tolled while an offer-in-compromise is pending, plus 30 days.
  • Income tax debts remain Priority Claims and non-dischargeable if the tax is assessable and the tax arises from:
  1. Unfiled tax returns.  (The tax return must have been filed for the claim to be dischargeable. A return may be deemed as filed when a debtor met with the IRS, calculated the tax liability and agreed to the amounts in a written, signed document, delivered to the IRS).
  2. A delinquent tax return filed within 2 years of the petition.  (The return must have been filed more than 2 years prior to filing the petition).
  3. A fraudulent tax return.

The conditions above are inclusive and each condition must be satisfied for the IRS tax claim to be reclassified from Priority to Unsecured and become dischargeable in Chapter 7 Bankruptcy.     

Filing and completing a Chapter 7 Bankruptcy from petition to discharge can be complicated and should not be taken lightly.  Attention must be paid to every detail as the slightest mistake can cause the case to be dismissed or worse, assets attached and liquidated.  If you are presently considering filing bankruptcy it is strongly recommended that you seek the expertise of an experienced bankruptcy attorney. 

At the Spear Law Firm,  our lawyers are experienced in handling Chapter 7 Bankruptcies and can assist you with these complicated matters.  Our attonreys are knowledgeable about Bankruptcy Laws and the subtle differences between California laws and Federal laws. 

For more information, or to discuss your specific case, contact our attorneys at the Spear Law Firm of the San Fernando Valley in Tarzana today.  Call our Attorneys at (877) 327-5291 / 8-SPEARLAW-1.