By: Jeena Cho, San Francisco Bankruptcy Attorney
This time of year, I get a lot of calls from panicked taxpayers. Despite common myth that taxes cannot discharged in bankruptcy, oftentimes it can be discharged.
Discharging Tax Debt in Chapter 7
In general, income tax debts, both Federal and State can be discharged in Chapter 7 if you meet the following criteria.
1. It has been more than 3 years since the return was due;
2. The return was timely filed or it has been at least 2 years since filing;
3. There was no fraud or attempt to evade taxes; and
4. No taxes were assessed within 240 days.
Even though the rule may sound simple, it’s not. There are many exceptions to the rule such as “tolling events.” For example, if you’ve filed for an Offer in Compromise, or requested a due-process hearing, it may toll (or delay) the running of the above dates.
Assuming you meet all the criteria for dischargeability, you can file for Chapter 7 and discharge the back taxes in full.
Steps for Discharging Tax Debt in Chapter 7
1. Order tax transcript
2. Determine dischargeability of tax debt
3. Gather information related to your income (paystubs, P&L, etc)
4. Review assets to determine exemption
5. Gather information on any other debts (credit card, car loan, mortgage, etc)
6. Complete credit counseling
7. Prepare Chapter 7 bankruptcy petition and sign
8. File Chapter 7 petition with bankruptcy court
9. Attend your 341 hearing (approximately 30 - 45 days after filing)
10. Complete another class - debtor education
11. Receive your discharge after 60 days
Chapter 7 vs. Offer in Compromise
- Chapter 7 takes about 3 - 4 months to complete from date of filing vs. Offer in Compromise that can take years.
- Unlike an Offer in Compromise where the IRS has the discretion to reject your offer, Chapter 7 is automatic. The IRS doesn’t get to decide if it wants to accept or reject your offer.
From this perspective, Chapter 7 is often preferred over an Offer in Compromise because it’s more straightforward and in general, more core cost effective.
If you live in San Francisco Bay Area and are facing overwhelming tax debt, bankruptcy may be the solution. Please call a San Francisco Bankruptcy Lawyer at (415) 963-4004.
Image credit: 401(K) 2013
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