Can you eliminate income tax debt in bankruptcy?

Last week, we wrote about several forms of debt that are generally nondischargeable in bankruptcy, including student loans, secured debt and family court obligations. Today, we will discuss one debt form that also has very tight restrictions governing when it can and cannot be discharged: federal and state income tax debt.

Unlike the three previously mentioned debts, it is possible for income tax debt to be discharged in a personal bankruptcy. However, it is a complicated process with many strict regulations. Georgia residents who are contemplating bankruptcy for income tax debt may want to contact a bankruptcy attorney to guide them through the process.

In order to be dischargeable, the income tax return must have been due for at least three years. This means that a return filed this year would not be eligible for discharge in bankruptcy until April 18, 2015 – three years and one day after this year’s tax filing deadline. If you requested an extension, your tax debt would not be eligible until October 16, 2015.

You must continue to file tax returns during the two years leading up to that eligibility date. In addition, your taxes must have been assessed at least 240 days prior to filing bankruptcy. For standard tax returns, this is usually not an issue. But if you have been audited, you may end up waiting months or years for the assessment to take place. In addition, the state assessment generally does not take place until after the federal assessment is complete. If you want both debts to be discharged, you must wait at least 240 days after both assessments are complete.

Source: Bankrate.com, “Bankruptcy can eliminate tax bills – maybe,” Justin Harelik