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Discharging of tax debt in bankruptcy and late tax filings

While a Chapter 7 bankruptcy filing assists in discharging most debt, it would be a mistake to automatically assume it will discharge tax debt in every circumstance. Whether tax debt is dischargeable depends on a number of factors.

Determining whether it is possible to discharge tax debt is dependent upon the type of tax relative to the kind of bankruptcy. What are called “stale” tax debts generally are dischargeable, but the same is not true for “fresh” debts. Also, there is to be no discharging of tax debt if there was a failure to file the appropriate tax returns.

What is less certain is whether a taxpayer can discharge the tax debt if a taxpayer files his or her tax returns late. In 2006, there was a change to the bankruptcy code creating a necessity of an “applicable filing requirement” when discharging tax debt.

Courts continually address whether forms filed late constitute tax returns under bankruptcy law. One court states that “belated filings after assessment are not an honest and reasonable effort to comply with the tax law” which means that these “filings do not constitute returns.” Another court also rejected an attempt to discharge tax debt during a year when a taxpayer filed late the necessary tax returns.

When dealing with complex issues related to both tax debt and bankruptcy, the advice and guidance of an experienced tax lawyer may be necessary. Such professionals can often help Michigan taxpayers understand all of their options and discover the best possible means for receiving relief.

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