Can Bankruptcy Wipe Tax Debt Clean?
Grammy-winning singer Dionne Warwick recently filed for bankruptcy in New Jersey, her home state. The singer cites her more than $10.7 million in federal and California tax debt as the reason for bankruptcy. The debt includes substantial penalties and interest that accrued on the back taxes. Although Warwick reports an income of $20,950 a month, $20,940 in expenses leave her with little cash to pay off the debt. The singer hopes that Chapter 7 bankruptcy will wipe out her existing tax liabilities and give her a fresh start.
A common myth is that income tax debt is never dischargeable. Actually, in many cases, tax debt can be discharged through bankruptcy. But the debt must be old. Under bankruptcy law, income tax debt may only be discharged if:
- The income tax was first due more than three years before you filed for bankruptcy
- The tax was assessed more than 240 days before you filed for bankruptcy
- You filed your tax return on time and without fraud more than two years before you filed for bankruptcy
The last requirement — that you filed your taxes on time and without fraud — means that you cannot have willfully evaded taxes. An honest mistake on an old tax return will not prevent you from discharging tax debt through bankruptcy.
Income taxes owed to the federal government and Pennsylvania are both dischargeable through bankruptcy. If you have significant state or federal tax debt, an experienced Pennsylvania bankruptcy attorney can advise you on whether bankruptcy may be the right option for you. Harold Shepley & Associates is a full service debt relief law firm. We can answer your questions about bankruptcy and we offer a free initial consultation.
June 12, 2013 Posted in Chapter 7 Tagged chapter 7 bankruptcy, income tax debt Leave a comment
