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Can a person eliminate tax debts through Chapter 7 bankruptcy?

No one enjoys paying the taxman. But even less fun experience is not paying the taxman and dealing with the consequences. When Tennesseans fail to pay their taxes, they can expect audits, penalties and, in some cases, the possibility of jail time. Scary as these consequences may be, however, some Tennesseans may believe that they need to tempt fate by not paying their taxes. Why? Because they do not have money to pay their tax liability.

Is that their only option? Many people think so - including many lawyers and accountants. This view is based on the common misconception that tax liabilities cannot be discharged through bankruptcy. But the truth is that tax liabilities, like many other debts, can be discharged through bankruptcy, including Chapter 7.

Under Chapter 7 bankruptcy, income tax can be discharged. To do so, an individual must show the following six things. First, the tax was last due more than three years before the person filed for bankruptcy. Second, the person filed a tax return more than two years before filing their bankruptcy petition. Third, the tax was assessed over 240 days before the petition was filed. Fourth, the taxpayer did not try to defeat or evade the tax, such as by filing a fraudulent tax return. Fifth, the tax was no longer assessable when the bankruptcy petition was filed. Finally, the tax was not secured.

When is a tax assessed? A tax is assessed on the day that an IRS officer signs the summary record of assessment. Doing so officially enters the tax liability on the IRS' books and records. The tax assessment usually follows shortly after a person files their tax return. But an assessment can happen months or even years later. For example, if the tax deficiency arises from an audit. Because the assessment date can vary, it's critical to ask the IRS for the assessment date before filing for bankruptcy.

Discharging tax liability can be a complicated and ever-shifting landscape. Tennesseans interested in learning more about whether they can discharge a tax debt may benefit from speaking with an experienced bankruptcy attorney.

Source: corporate.findlaw.com, "Bankruptcy: The Silver Bullet of Tax Defense," Accessed October 18, 2016

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Mark T. Young & Associates
2895 Northpoint Blvd.
Hixson, TN 37343

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