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New Jersey residents - Bankruptcy may give some tax relief

Many New Jersey residents may not know that debt owed for back taxes generally cannot be discharged in a bankruptcy. However, there are some notable exceptions under the Bankruptcy Code that may allow certain tax debts to be removed.

Taxes that can possibly be discharged have to meet certain minimum criteria. The taxes have to have an original due date for filing an income tax return of at least three years prior to filing. Those tax returns have to have been filed at least two years prior to filing for bankruptcy, and they must not have been filed fraudulently. The filer cannot be guilty of tax evasion, and any tax assessment has to be at least 240 days old. Only taxes that meet all of these circumstances may be considered for discharge.

Unfortunately for most debtors, most tax debt does not meet these criteria. However, a bankruptcy may be a good time to work out an offer in compromise with the IRS. This is because, under normal circumstances, any cancelled debt may have to be included as income on the current year's tax return. However, debt cancelled during a bankruptcy is generally exempted from this requirement.

Many New Jersey residents who owe back taxes to the IRS may believe they have nowhere to turn for help. However, under the right circumstances, filing for bankruptcy protection may eliminate at least part of that tax debt. Eliminating dischargeable debt, like credit card debt, can also give the debtor the financial freedom to pay for his or her nondischargeable debts. In addition, negotiating with the IRS during a bankruptcy may help the filer come to an agreement that could otherwise not be made.

Source: MontereyHerald.com, "Barry Dolowich: Bankruptcy and tax debt," Barry Dolowich, Oct. 23, 2012

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