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The discharge of tax debt through Chapter 7

On Behalf of | Mar 5, 2015 | Bankruptcy

Individuals who file for Chapter 7 bankruptcy and successfully receive a discharge of their personal debt are often still responsible for any federal taxes that they owe. However, debtors who are unable to pay may seek to have this tax debt discharged as well. Individuals in Virginia who are in this situation may need information about the requirements.

Whether or not an individual qualifies for discharged tax debt through Chapter 7 bankruptcy depends on if the individual as well as the owed taxes meet certain conditions. The tax debt must be from income taxes that are a minimum of three years old. The individual needs to have filed valid tax returns for at least the two years prior to the bankruptcy filing, and it must have been a minimum of 240 days since the IRS assessed the tax debt. The debtor also cannot have willfully committed tax evasion, including repeatedly failing to pay taxes.

Tax debt that cannot be discharged through Chapter 7 bankruptcy includes taxes owed on tax returns that were not filed and penalties resulting from the tax debt, such as from tax fraud. Some tax penalties, however, may be eligible. Withheld taxes from payrolls and taxes from trust funds are also not dischargeable. Additionally, a tax lien that the IRS places on property remains even if the rest of the tax debt is discharged, so the lien must be paid prior to selling the property.

After tax debt is discharged through Chapter 7, the individual no longer has to pay those taxes, and the IRS is prohibited from bank account or wage garnishment. When an individual does not achieve discharged tax debt this way, the debtor could consider other methods, such as compromising with the IRS for a reduced settlement or agreeing with the agency on a payment plan. If the situation gets too difficult for the debtor to handle alone, the individual might turn to a bankruptcy law attorney.