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Bankruptcy and Tax Debt

Updated on March 14, 2013

Individuals and businesses find they need to file for bankruptcy for a number of different reasons. In the past, it was believed that no tax debts could be discharged, regardless of the reason for accumulation or the age of the debt. This outdated belief is not 100% accurate as there are, in fact, ways in which tax debts can be included in a bankruptcy filing. Don't assume you can't have your tax debt discharged. Minnesota bankruptcy law may allow you to include your tax debt but you must speak to your lawyer about your debt before preparing your petition.

What Tax Debts are Dischargeable?

There are five simple criteria that must be met when determining whether or not your tax debt is dischargeable. Your tax debt must meet all five criteria in order to be eligible. These rules include:

  • The tax return in question must have been due at least three years prior to the time of bankruptcy. You must take your requests for extensions into consideration as you make this determination as the extended due date is the date that must be more than three years old.
  • The tax return must have been filed and needs to have been filed at least two years prior to the time of the bankruptcy petition.
  • The IRS assessment must be at least 240 days old before you can attempt to have it discharged during a bankruptcy proceeding.
  • Your debt must not be the result of a tax evasion conviction.
  • Your debt must not be the result of a fraudulent tax return.

Discharging Taxes in Bankruptcy

Additional Bankruptcy Criteria for Tax Debts

An individual filing for bankruptcy may not include a tax debt unless he has filed all of his tax returns for the four (4) years prior to the date of his bankruptcy petition. The returns must be filed, at the very latest, before the date of the first Section 341 Meeting of Creditors.

Individuals who know they owe taxes to the IRS must file a tax return before attempting to discharge a debt in bankruptcy court. The knowledge that you owe the debt does not alleviate you of your obligation to file the legally required documentation.

Alternative Tax Relief Options

There are five ways to eliminate tax debts. Most of these alternatives involve making payment arrangements with the IRS. These include:

  • Asking the IRS for a monthly installment plan (be prepared to pay interest).
  • Asking the IRS to wait a year before attempting to collect on your tax debt.
  • Making long term payment arrangements for an amount that is less than your total debt.
  • Making a lump sum payment or a short-term installment loan plan to satisfy a reduced total.

The final option is, of course, bankruptcy. As with most debts, bankruptcy should be considered as a final solution when all other options fail. The IRS can be very adamant and aggressive when it comes to collecting the money they are owed.

It’s best to work with a qualified Minnesota bankruptcy lawyer or tax attorney and/or financial professional to determine which option is best for you. The sooner you can rid yourself of your tax burden to the IRS the better.


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