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Can you discharge tax debt through bankruptcy?

The federal income tax filing deadline is less than two weeks away. If you have already completed and filed your return, congratulations! You don’t have to worry about the myriad of forms, calculations and deductions relating to it for at least another year. If you have not, hopefully you understand how to extend your filing deadline or at least how to establish a plan to pay your tax debt over time.

However, for some businesses, their debt (including their tax obligations) may be too much for the company to bear and threatens their very existence. In these situations, bankruptcy may be the only viable option. After all, bankruptcy can reduce your debt dramatically and allow you to “start fresh” financially. 

While bankruptcy may be a welcome respite, it does not apply to all types of debt. Indeed, income tax debt may be discharged if it meets certain criteria; including being three years or older, be created incident to a legitimate tax return; and assessed at least 240 days before the tax return was filed.

However, tax debt attributable to payroll taxes cannot be discharged. This obligation will stay with the business regardless of whether the obligation to pay other debts is relieved. Nevertheless, if you can get out from under insurmountable debt and still keep your business afloat, that is a victory in itself.

With that said, have a conversation with an experienced tax attorney who has relationships with a bankruptcy lawyer so that all options can be explored to save money.

The preceding is not legal advice. 

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Law Office of Ginger C. Cord, PSC
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Lexington, KY 40507

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