Tax Law (Questions About Taxes)/Bankruptcy on tax debt

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Question
I live in Kentucky.  I estimate I have around 30k in tax debt, but I am not sure.  I have a small amount of debt in medical bills.  I am currently working as a truck driver.  I am thinking about filing Chapter 7 bankruptcy so I can try to clear some of this debt & focus on my student loan & child support.  I am finding conflicting information on whether I can file bankruptcy on tax debt.  Someone indicated that the IRS might lower the amount of my debt.  Any guidance you can offer would be greatly appreciated.  Thank you

Answer
Barbara,

Thanks for your question.

You're getting conflicting answers because the answer is not straightforward. The short answer is "It depends."  

You can discharge debts for federal income taxes in Chapter 7 bankruptcy only if all of the following conditions are true:
1. The taxes are income taxes. Taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy.
2. You did not commit fraud or willful evasion. If you filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes, such as using a false Social Security number on your tax return, bankruptcy can't help.
3. The debt is at least three years old. To eliminate a tax debt, the tax return must have been originally due at least three years before you filed for bankruptcy.
4. You filed a tax return. You must have filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy.
5. You pass the "240-day rule." The income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet. (This time limit may be extended if the IRS suspended collection activity because of an offer in compromise or a previous bankruptcy filing.)

The situation for Kentucky taxes is somewhat different.  Generally, in order to discharge a tax debt during bankruptcy, the tax debt must meet all four of the following criteria:
1. The tax must be income taxes or “gross receipt taxes.”
2. The tax must be over three tax years old.
3. Your tax return must have been filed on time.
4. The tax debt must not be amended or challenged by the IRS as inaccurate.

Additionally, there are four different types of tax debts that are automatically excluded from your bankruptcy discharge:
1. Unpaid taxes due within three years of the bankruptcy filing;
2. Unpaid taxes for returns filed late, but within two years of the bankruptcy filing;
3. Unpaid taxes for tax years when the debtor did not file a return; and
4. Upaid taxes due when the debtor filed a fraudulent return or tried to evade the tax obligation.

Hope this clears it up a little and is helpful.

John Stancil, CPA

Tax Law (Questions About Taxes)

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John Stancil, CPA

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I can answer questions on personal income taxes, partnerships, and some corporate income taxes. I can deal with some state tax questions. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I am Professor Emeritus at Florida Southern College. Sales taxes and property taxes are state and local issues so I am not likely be be able to give you an in depth answer on those types of taxes. I have maintained a CPA practice, specializing in tax, for over 35 years. I am a member of the National Association of Tax Professionals, The Florida Insititute of CPA's, The NCPE Fellowship. In addition I am a Certified Mentor for SCORE. Visit my website at www.mybaldcpa.com. I also offer seminars and consultations to churches and clergy on their tax issues at www.churchtaxsolutions.com Also visit my blog, www.thetaxdocspot.com. I am listed on Tax Connections at https://www.taxconnections.com/profile/John-Stancil/12258973 Prepare and file your own taxes at www.1040stancilcpa.com

Experience

I hold a doctorate in Accounting, and am a CPA. My certifications of CIA, CFM, and CMA are inactive. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I have operated a CPA firm for over 37 years and have taught accounting and tax at the college level for over 35 years.

Organizations
FICPA, NATP, NCPE Fellowship, Lakeland Business Leaders

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The CPA Journal, Florida CPA Today, Green Consumer, Green Business, Global Sustainability as a Business Imperative, Palmetto Review, NATP TaxPro Quarterly, Mustang Journal of Finance and Accounting.

Education/Credentials
DBA University of Memphis MBA University of Georgia BS in Accounting Mars Hill University

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