Income Taxes. The only thing worse than paying them is owing them. If you find yourself owing income taxes and you cannot pay them, then you might be considering filing for bankruptcy. Typically, most people who owe income tax consider filing for chapter 13 bankruptcy. But that is not always the best option. If your income tax debt is eligible to be discharged, then you should consider filing for chapter 7 bankruptcy.
When you file for bankruptcy, know that your back taxes might not be discharged. In other words, after your bankruptcy is over, you will still owe the back taxes. In those circumstances, filing for chapter 7 bankruptcy might not be right for you. But how do you know if your income tax debt can be discharged?
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If you meet the following factors, you can discharge your past due income tax. The requirements are:
1. You filed a tax return for the year/years that you owe back taxes;
2. Your back taxes are for a tax return filed at least two years before you file for bankruptcy;
3. Your tax return for the back taxes was initially due at least three years before you file for bankruptcy;
4. The IRS has not assessed your liability for your back taxes within 240 days before you file for bankruptcy; and
5. You did not willfully evade paying your income tax.
So how should you use this information? First, be aware of the time periods surrounding your income tax debt. If you are close to one of the deadlines mentioned above, make sure you file when it is to your advantage. Second, always file your tax return; even if you cannot pay your income taxes. Finally, make sure you have an accurate accounting of your tax situation before you make any decisions about how to proceed. You can contact the IRS and get a free tax transcript.
But this is not the end of the analysis. In some cases, the IRS, or your state taxing authority, will have placed a lien on your property. By filing for chapter 7, your personal liability will be wiped off the books. In other words, the IRS cannot garnish your wages or plunder your bank account to pay off your income tax debt. But you will have to pay the IRS before you can sell your property with a clear title. If the IRS already placed a lien on your property, you need to weigh the advantages and disadvantages of filing for chapter 7 bankruptcy. If that is the case, consult with a skilled bankruptcy attorney to determine if filing for chapter 7 is your best option.
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