Austin Bankruptcy Lawyers Clarifies Tax Handling in Bankruptcy

Austin Bankruptcy Lawyers has issued guidance detailing the treatment of taxes during bankruptcy proceedings in Texas. The firm clarifies that while not all tax debts are dischargeable, specific circumstances allow for relief from debts stemming from older tax returns.

The guidance explains that individuals undergoing bankruptcy must continue to pay taxes as usual. Although the firm cannot facilitate evasion of tax liabilities, certain older income tax debts meeting specific criteria can be discharged. For a debt to be eligible, it must relate to a return filed over three years ago, have been assessed by tax authorities at least 240 days prior, and not be associated with fraud. The firm cites an example where clients successfully discharged $74,000 in tax debt.

The firm also clarifies that business-related taxes such as payroll, sales, or property taxes are generally considered priority debts and are non-dischargeable in bankruptcy. Furthermore, individuals or businesses must have filed all required tax returns before initiating bankruptcy proceedings.

The guidance addresses Chapter 7 and Chapter 13 bankruptcies. In Chapter 7, tax refunds may be turned over to the trustee, though exceptions exist. For Chapter 13, any portion of a tax refund exceeding $2,000 must be allocated to creditors over the plan's duration. The firm advises clients to adjust withholding to avoid significant year-end refunds.