Bankruptcy for Tax Problems

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Darrin Mish: Bankruptcy for tax problems. It’s a common myth that tax liabilities cannot be discharged in bankruptcy. There’s almost never a week that goes by without a taxpayer sitting in my office and indicating to me, “But hey, I was told that taxes can’t be discharged in bankruptcy” and that’s a bit of a myth. It’s been promulgated by the IRS and Congress and bankruptcy attorneys for a long, long time. But there are actually some ways that you can discharge income taxes in bankruptcy. Notice that I said income taxes. I didn’t say payroll taxes. Payroll taxes, or the trust fund recovery penalty, which is a vestige of the payroll tax, cannot be discharged in a bankruptcy.  Click here to watch or read more information on IRS Back Taxes.

And for the most part, in this little video, I only have time to talk about Chapter seven bankruptcies. You want to go into Chapter 7, if you can, because a Chapter seven liquidates your liabilities. It means that you have no liability remaining if all goes well in your Chapter 7.

There’s also a Chapter 13 repayment plan type of bankruptcy, which is for consumers. There’s limitations to a Chapter 13, but essentially, you end up in a repayment plan, which normally encompasses somewhere between a 36 60 month payout timeframe.

So you want to avoid being in Chapter 13 with regard to your tax liabilities, if you can, because you’ll end up paying some large part of the taxes back in Chapter 13, if you end up in that situation.

And it’s very common for bankruptcy lawyers to push their clients into a Chapter 13 because, frankly, bankruptcy lawyers make more money for a Chapter 13 than they do for Chapter 7.

In my opinion, about 90% of the bankruptcy lawyers in the United States don’t even know that taxes can be discharged in bankruptcy, and I find that rather disturbing but they, in fact, can as I indicated.

So for a Chapter 7, there’s three rules: There’s a 3 year rule, which stands for the proposition that the returns had to have been due (including the extensions) for at least three years before they can be dischargeable.

The 2 year rule stands for the proposition that the returns had to have been filed (if they were filed late) for at least two years. And the 240 day rule is simply that the taxes must have been assessed for at least 240 days.

So those are the three timing rules for your bankruptcy. It’s important to know, exactly when your taxes were assessed. And it’s really important that a seasoned, experienced tax professional does the analysis to determine whether or not your taxes can be discharged in a bankruptcy.

If you’re one day early, a month early or something like that and you file a Chapter seven to try to discharge your tax liabilities, you lose. So it’s really important that the timing be analyzed correctly.

Also, you’re going to want to choose a bankruptcy attorney who is well seasoned and well experienced in the discharge of taxes in bankruptcy. So if they tell you something like, “Well let’s see what happens,” I would suggest that you might want to try to find someone else.

If you want a bankruptcy analysis, in terms of timing, done for your tax case, then you might want to give us a call. You can reach us toll free at 888 438 6474, and our website is

There are a lot of trips and traps in terms of determining whether or not the timeframes for bankruptcy are applicable in your case or not. There’s a number of tolling factors that can really screw you up in terms of whether or not the time limits have elapsed or not.

This is not a time to guess whether or not you’re eligible for a discharge or not. It’s something that you want to be certain of before you go ahead and do it.

If you have any questions, feel free to contact us at Or, again, visit the website at Thanks for dropping by.

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