What are the tax consequences of Chapter 13 Bankruptcy?

In Washington, the tax consequences of Chapter 13 Bankruptcy depend on the type of tax debt and the timing of when it is discharged. Generally, taxes that have been assessed more than three years before the filing of the bankruptcy petition are dischargeable. Also, any taxes that are assessed while in the bankruptcy are dischargeable. However, taxes incurred within three years of the petition filing and taxes found to be fraudulent are generally not dischargeable. When filing for Chapter 13 Bankruptcy, there may be potential consequences for taxes that are not discharged. For example, if a tax debtor does not pay the tax debt in full within the repayment plan, the IRS could impose a lien on the debtor’s property. This could be used to collect the unpaid debt as well as accrued interest and a potential penalty. After the completion of a repayment plan, the debtor must file a tax return for the year of the bankruptcy discharge. This return will either include an income tax liability or a refund of the amount paid in the bankruptcy plan. Any tax refunds will be used to pay creditors, but the IRS will not receive any payment until after all the unsecured creditors are paid in full. Finally, the debtor must remain up-to-date with all taxes that become due after the bankruptcy discharge. This includes filing returns and making payments on time to avoid potential penalties. Failure to comply could result in the IRS taking various forms of collection action against the debtor.

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