When you consult with an Arizona bankruptcy lawyer and you have tax debt, your attorney will go through a five-prong test to determine whether the taxes can be discharged in a Chapter 7 or Chapter 13 bankruptcy:
(1) The taxes must be at least three years overdue before you file bankruptcy. For example, 2008 taxes are due by April 15, 2009. As a result, you would have to wait until after April 15, 2012 to file bankruptcy in order to discharge 2008 taxes.
(2) The tax return must have been filed more than two years before you file bankruptcy. For example, if you didn’t file your 2008 tax returns until July 2011, then you would have to wait at least until July 2013 to file your bankruptcy in order to discharge such taxes.
(3) The tax must have been assessed more the 240 days before you file bankruptcy.
(4) You did not willfully attempt in any manner to evade or defeat such tax. For example, if you intentionally failed to file a tax return, a court may find that this constituted willful evasion.
(5) The taxpayer did not file a fraudulent return.
If you owe the Internal Revenue Service or the Arizona Department of Revenue a large amount of taxes, the first thing your Arizona bankruptcy lawyer will do is order official tax transcripts. Your Arizona bankruptcy lawyer cannot just look at copies of your previous tax returns to determine whether your taxes are dischargeable. Only official tax transcripts from the IRS and ADOR provide the requisite detail to determine whether the five prongs listed above have been met.
If your taxes are not dischargeable, there is still hope. A debtor can use a Chapter 13 bankruptcy to pay overdue taxes over the course of 3 – 5 years. This is a great benefit of Chapter 13. After all, if you make too much money to qualify for Chapter 7 under the Means Test, you will have to file Chapter 13 anyway. And if you have to make monthly payments in your Chapter 13, the trustee will use that payment to pay 100% of your non-dischargeable tax debt. That way, you get the most “bang for you buck” in the Chapter 13 because your Chapter 13 payments will be used to pay a debt that you would have to pay anyway, with or without bankruptcy.