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Tax debts may be eligible for discharge with bankruptcy


Illinois residents who have outstanding tax debts may be interested in ways to discharge those debts through bankruptcy. While this is not always possible, there are certain situations where a discharge of taxes is possible.

Generally, tax debts owed to the government are not dischargeable in bankruptcy. However, depending on the type of bankruptcy that a person files, there may be a way to discharge these debts. In a Chapter 13 bankruptcy, tax debts are usually paid as part of the bankruptcy repayment plan. In a Chapter 7 bankruptcy, though, certain types of tax debts may be discharged outright. This usually depends on the age of the debt and the nature of the tax.

There is a series of requirements for discharging federal tax debts in Chapter 7. The debt must be over three years old and must have been for income tax, not payroll or fraud penalties. The taxpayer must have properly filed a return for those taxes more than two years prior to filing for the bankruptcy. In addition, there must not have been any willful evasion of taxes or other kind of tax fraud in connection with the tax return. Lastly, the IRS must have performed a tax assessment at least 240 days prior to the bankruptcy filing. If the taxes are discharged, then any penalties that have been assessed on those taxes will also be dischargeable.

Once the taxes are discharged, the IRS can no longer garnish wages or take other collection actions. For assistance on filing for personal bankruptcy, an attorney may be able to help. The attorney may be able to use the bankruptcy process to stop repossession or eliminate debt. This can help the person be better prepared to deal with life's financial challenges.