Maxine Aaronson, Attorney at Law
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Tax Newsletter

  • Some Federal Income Tax Aspects of Bankruptcy
    When the debts of an individual or business entity exceed the fair market value of assets, one option is to seek protection from creditors under U.S. Bankruptcy laws. There are several forms of bankruptcy actions that may be filed,... Read more.
  • Life Insurance Proceeds & Taxes
    A common misconception about life insurance is that it is “tax-free.” While the build up in cash value of a life insurance policy is typically not subject to any income tax, the death benefit payable on the policy may be... Read more.
  • Joint Tax Returns and the Innocent Spouse Doctrine
    Many married couples file joint tax returns to take advantage of certain benefits offered by this filing status. This may result in the unfortunate and unintended consequence of one spouse being held responsible for the underreporting... Read more.
  • Reducing Tax Liability Through Flexible Spending Accounts
    To provide some relief from rising health care and dependent care costs, federal tax laws authorize the establishment of “flexible spending accounts” (FSAs), sometimes known as “flexible reimbursement accounts.”... Read more.
Tax News Links

Unpaid Income Taxes & Bankruptcy

Government income taxes may or not be dischargeable under a Chapter 7 (liquidation) bankruptcy. Income taxes are usually considered “priority unsecured debts,” and have a higher need to be paid over other unsecured debts such as doctor’s bills or credit card accounts.

However, under certain circumstances, income taxes may be dischargeable.

A 3-Year Lapse

For income taxes to be dischargeable, 3 years must lapse from the date the taxes were last due, including extensions. This due date is calculated from the date the debtor’s tax return is filed. Also, taxes assessed by the IRS are dischargeable if they were assessed 240 days (approximately 8 months) before the bankruptcy petition is filed.

Late Filing Doesn’t Count

Filing a late income tax return, or failing to file, will not trigger the beginning of this 3-year period, and the debtor may end up filing for bankruptcy too early, and, accordingly, will not be able to discharge the overdue tax.

Furthermore, if there are problems with your taxes, such as fraud or willful evasion, the IRS may oppose any attempt by to you to discharge the tax debt. Also, any income taxes assessed after you file your bankruptcy petition are not dischargeable.

Exceptions

Certain taxes are not dischargeable in bankruptcy. These taxes include:

  • Property taxes
  • Federal tax liens that are already attached to your property
  • Certain excise taxes

Evaluate Your Situation

It is important to evaluate your tax situation before you file for bankruptcy relief. It is advisable to discuss your tax history and liability with a tax or bankruptcy professional before making a final decision