IRS Income Tax Bankruptcy

IRS Income Tax Bankruptcy

There are some things you should know about taxes before you file bankruptcy.  First every person that files bankruptcy must have filed their income taxes.  We cannot file your bankruptcy unless the tax returns have been filed. 

Second IRS Income taxes are dischargable in bankruptcy if the income tax debt is 3 years old, there has been no new assessment of the income tax within the last 240 days and you filed the return at least 2 years ago.  There are some rules that extend these time limits if you have filed an offer in compromise or if you have filed a bankruptcy within the 3 year period.   If you have failed to file returns, committed fraud or the IRS has filed a substitute for return you have probably lost your right to bankrupt the IRS debt.   

In our bankruptcy districts the Debtors lose their income tax refunds in Chapter 13 cases and normally keep their refunds in Chapter 7 cases.  The exemptions that allow you to keep property are so large that it is rare to lose refunds in Chapter 7 cases.   However the tax refund is not your normal monthly paycheck and disposable income.  In a Chapter 13 the bargain between the Debtor and the court is that the Debtor lives in a tight budget for 5 years and all of his left over disposable income is paid to the creditors.   The tax refund is ”disposable income” that is turned over to the Chapter 13 trustee so that creditors can be paid.  In order to prevent this Debtors should increase their deductions allowing themselves more monthly income to live on and insure they pay reasonable expenses such as hair cuts and school lunches people forget about in plans.   

One of the most common mistakes is not not deduct enough from payroll to pay income taxes.   The failure to pay taxes as they become due often causes Chapter 13′s to fail.       

Attorney Nick C. Thompson Louisville Kentucky Bankruptcy Attorney