Tax Motivated Bankruptcy

    Bankruptcy law and its relationship to tax debt is often misunderstood. This is understandable considering the tremendous amount of conflicting information found on the internet and the complex relationship between the tax code and bankruptcy law.

    Proof that these misconceptions exist is found in the most common question we receive regarding tax debt. It’s not ‘dischargeable’ in bankruptcy, right?

    Not only can certain tax debts be discharged or “wiped out” in bankruptcy, bankruptcy will also:

    • Stop collection efforts by the IRS on the date of the bankruptcy filing
    • Discharge the debt along with it’s penalty and interest
    • Discharge other debt, allowing you to pay off tax debt that may not be affected by the bankruptcy filing more easily
    • Allow a work out or repayment plan (Chapter 13 bankruptcy) to pay off part or all of your principal tax debt
    • Allow you to work out a better Offer in Compromise, via the threat of a legitimate bankruptcy case

    In order to discharge or wipe away the principal income tax debt in bankruptcy, five basic criteria must be met:

    1. The due date for filing of the tax return must have been more than three years ago including extension periods.
    2. The tax return had to have been filed by the taxpayer and before the IRS files one, more than two years prior to the filing date. Substitute tax return related tax debt is not dischargeable nor is tax debt based on returns filed after the IRS filed a substitute return.  (Hint.  File your missing returns now not later)
    3. That tax has to have been assessed more than 240 days prior to the filing date.
    4. That tax return can’t be “fraudulent.”
    5. The taxpayer can’t be guilt of tax evasion or an attempt to evade or defeat the tax intentionally.

    The application of these rules and bankruptcy rules in general to a taxpayer’s tax debt history is not a simple process. Despite this, many taxpayers attempt the use of bankruptcy without an Arizona Bankruptcy Attorney or other counsel or without counsel experienced in tax debt and bankruptcy matters, to their eventual detriment.

    There is no substitute for experience in this area of law. We have helped taxpayers “wipe out” or control literally millions of dollars of tax debt and we can you help you determine whether bankruptcy makes sense. It often makes more sense in the long run than other options.

    If you have serious tax debt, review any articles about tax debt and bankruptcy on this site and the blog, and then call us to discuss bankruptcy and its relation to your situation.