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Your tax burden and bankruptcy

As the after-effects of the Great Recession are still lingering on our personal finances, scores of Americans are still forced to declare personal bankruptcy. People declare bankruptcy for a variety of reasons, including credit card debt, overdue mortgages and medical bills. There is also hope for those who are financially insolvent because of tax debt. A series of reforms in 2005 changed the way that personal bankruptcy was administered, but provisions still exist to help those who may be suffering under large tax burdens. Your Washington, D.C., attorney can help you learn more about how these provisions apply to your individual case, but we will provide a quick overview of the relationship between taxes and bankruptcy.

First, it is important to remember that an audit will not be halted because you declare bankruptcy. Bankruptcy may halt collection action, but the audit will continue. There is, however, a 10-year statute of limitations along with 30 days' administrative time included in your bankruptcy proceedings, so tax burdens over a decade old are most likely to be discharged.

Still, not all of your tax debt can be discharged during your bankruptcy. Certain debts are considered "priority debts" and must be paid. These include child support and student loans, for example, as well as certain tax penalties, fraud assessments and some payroll taxes. The priority debt must be restructured through a Chapter 13 procedure instead of a Chapter 7 discharge.

Your tax debt is only dischargeable in bankruptcy if it relates to personal income tax that is at least three years overdue. The tax return must have been filed by the individual taxpayer in order for this rule to stand. In addition, if you have only recently filed your 2006 tax return, for example, you must wait for 240 days to have the debt discharged.

Tax debt and bankruptcy can be confusing, so be sure to involve a qualified tax specialist when consulting legal professionals about your financial insolvency. With the right team, you, too, can enjoy the financial freedom that comes from having significant debts discharged.

Source: www.foxbusiness.com, "How bankruptcy impacts your taxes" Bonnie Lee, Jul. 25, 2013

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