rules, the tax debt is a Priority debt and the taxes cannot be discharged, except by payment. For example, the tax might be over 3 years old, but if the taxpayer did not file a return for that tax year at least 2 years prior to the bankruptcy filing, then The Two Year Rule is not met and the tax debt is considered a Priority debt that must be paid in full. You can think of Priority taxes as embryonic Unsecured taxes. A Priority tax debt can be paid over 3 to 5 years in a Chapter 13 repayment plan. And a fringe benefit of including Priority taxes in a Chapter 13 is that the monthly interest charged by the IRS stops accruing the moment the Chapter 13 is filed. Secured Taxes: If a tax lien has been filed, either judicially or through recordation, against a taxpayer’s real or personal property least more than 240 days preceding the filing date of the bankruptcy (plus any period of over-lapping time during which an offer in compromise was pending, plus 30 days). 4. NON-FRAUDULENT RETURN RULE. 11 U.S.C. § 523(a)(1)(C). 11 U.S.C. §1328(a) (2). The tax return in question was nonfraudulent. 5. NO WILLFUL TAX EVASION RULE. 11 U.S.C. §523(a)(1)(C); 11 U.S.C. §1328(a)(2). The taxpayer has not engaged in activity deemed a willful attempt to defeat or evade the tax. So, if a tax debt satisfies each of the above rules, it is Unsecured and is fully dischargeable, without any payment, in a Chapter 7. Priority Taxes: If the tax debt fails any one of the above WWW.LAWYER-MONTHLY.COM 25 A common misconception about federal and state personal income taxes is that they cannot be discharged in a Chapter 7 or a Chapter 13 bankruptcy.
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