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Can A High Income Taxpayer Bankrupt Income Taxes?

If a taxpayer has income of 100 to 500 thousand dollars a year or even higher and owes tax debts he or she cannot pay, can a chapter seven bankruptcy be filed to discharge the taxes?  Secrets exposed – Yes!

There are some hoops you have to go through:  the taxes must be income and not payroll trust fund taxes; the usual timing rules have to be met;  and most important the amount of tax debt must exceed the amount of consumer debt.

If the amount of tax debt exceeds the amount of consumer debt, you are not a consumer debtor and subject to the means test of BAPCPA nor

the disposable income rules from pre-BAPCPA.

There are some court cases that are troublesome with SFRs…assuming no fraud – the tax debt can be bankrupted regardless of income.

The assumption on no fraud is an important one here; a high income taxpayer may be held to a higher standard than other taxpayers.  Some courts have taken the position that the only act necessary to establish fraud is the failure to pay the tax at a time when the tax payer had the money and used it for other spending – almost like a trust fund standard.

If you are contemplating such a bankruptcy for relief from your tax debt, you cannot use one of these tax relief firms that advertise on television.  The result will be worse than a veterinarian attempting brain surgery.  Frankly even most brick and mortar bankruptcy attorneys are blown out of the water, when confronted with the challenge of bankrupting such debts.


Dana M. Ronald

Tax Crisis Institute

May 4th, 2012