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Can taxes be discharged through Chapter 7 bankruptcy?

When debts pile up, the size of those obligations can cast a shadow that makes it hard for Tennesseans to comply with their other financial requirements, including the paying of taxes. That raises a question for Tennesseans harboring both regular debt and tax debt: Does completing the Chapter 7 bankruptcy process discharge both types of debts or just regular debts?

The answer is that it depends. Chapter 7 bankruptcy provides an avenue for discharging federal tax debts, but only if a series of conditions are met.

First, only income taxes are eligible to be discharged. Chapter 7 will not dent payroll taxes or any penalties for fraud.

Second, at least two years before filing for bankruptcy, the filer must have filed a tax return for the year or years that they want to have discharged, and third, the tax debt must be at least three years old.

Fourth, the IRS must have assessed the tax 240 days or more prior to when the person filed for bankruptcy. Certain factors may increase the number of days required before filing.

Fifth, the filer must not have committed willful tax evasion. Willfulness can come in a variety of shapes and sizes, from repeated failures to pay taxes to changing one's name or Social Security number, to withdrawing funds from a bank account and then hiding it from the authorities.

Finally, the filer must not have engaged in tax fraud. In other words, the relevant tax returns must be free of any information intended to defraud the IRS.

If Tennesseans checks off all of these boxes, their tax debt may disappear at the end of the Chapter 7 process.

Source: FindLaw, "Bankruptcy and Taxes: Eliminating Tax Debts in Bankruptcy," Accessed August 21, 2016

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

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