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Can tax liabilities be discharged in bankruptcy?

Some Florida residents who are facing monetary difficulties may wonder what impact filing for bankruptcy could have on their tax liability. Before filing for bankruptcy, some experts recommend that people check to see whether filing will benefit their specific tax situation. Some debts are not dischargeable.

When the IRS has chosen to audit someone, filing for consumer bankruptcy won't prevent them from completing the audit. The IRS will not be able to collect taxes while the bankruptcy is in progress. However, the statute of limitations is extended during the bankruptcy and for 30 days after it is completed. Therefore, the IRS may have more than ten years to collect from a person who files for bankruptcy.

In addition, not all tax liabilities may be discharged in a bankruptcy proceeding. The only tax liabilities that may be discharged are those that were incurred at least three years prior to the bankruptcy filing. The date of filing is counted from when the tax return was due, including extensions. However, a person cannot discharge a tax debt less than 240 days old in bankruptcy. Thus, if a person files a 2006 tax return in 2013, that liability cannot be discharged for 240 days. In addition, the taxpayer must personally have filed the return; substituted returns filed by the IRS may not be discharged. When a person fails to file a tax return at all, those debts cannot be discharged in bankruptcy, no matter how much time has passed.

When a person is struggling to pay debts, bankruptcy can sometimes offer some relief. A local bankruptcy attorney may be able to provide information on which debts can be discharged, whether bankruptcy is the best course of action and which type of bankruptcy would be most beneficial.

Source: Fox Business, "How Bankruptcy Impacts Your Taxes", Bonnie Lee, July 25, 2013

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