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Illinois taxpayers may find relief from tax debt in Chapter 7

Most Illinois taxpayers have heard that taxes are not eligible for discharge in bankruptcy, and for the most part, it's true. However, there are some taxes that may qualify for discharge under a Chapter 7 bankruptcy. Whether taxes are eligible for discharge depends on a number of factors.

There are certain criteria that have to be met in order for taxes to be eligible for discharge. First, the due date of the tax return for which the taxes are due must be at least three years prior to the bankruptcy filing. Second, the actual tax return for those taxes must have been filed at least two years prior to filing bankruptcy. Third, any tax assessment by the IRS has to be at least 240 days prior to filing.

If these timelines are met, the taxpayer must not be guilty of tax evasion, and tax returns must be free of fraud. If all of these conditions are met, the taxes may be eligible for discharge. For those taxes that aren't eligible for discharge under these requirements, a taxpayer may be in a better position to negotiate with the IRS during a bankruptcy.

Filing for Chapter 7 bankruptcy protection can put an Illinois taxpayer who owes back taxes in a unique negotiating position. If an offer to compromise can be reached with the IRS, any taxes that the IRS agrees to cancel may not have to be counted as part of the taxpayer's gross income for the current tax year. Ordinarily, any cancelled taxes may have to be counted as gross income, but during a bankruptcy, that amount may not be counted as income. Regardless of the taxpayer's situation, it may benefit the taxpayer to seek advice regarding how to deal with back taxes.

Source: Herald-Tribune, "Bankruptcy and tax debt," Barry Dolowich, Oct. 23, 2012

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