Tax Debt, Bankruptcy and You

Federal income taxes are the only type of taxes that are eligible for discharge, or elimination, in bankruptcies. Businesses will not be considered for discharge of their taxes, only individuals. Nor can you discharge other types of taxes, such as excise taxes, gift or estate taxes, sales taxes or fuel tax.

There are five specific rules that must be followed before any tax debt will be considered for discharge. These are:

The tax debt must be at least three years past due. Your tax return must have been due a minimum of three years prior to filing for bankruptcy. The due date must include extensions.

You must have filed the tax return at least two years before filing bankruptcy. It must have been at least two years from the date you filed the return.

The tax assessment must be at least 240 days old.

The tax return was not fraudulent.

You are not guilty of tax evasion.

If you have not filed a tax return for the year in question, your tax debt will not be discharged.
If these requirements are all met, your taxes will be dischargeable. Otherwise, bankruptcy will offer no relief from tax debt.

In an attempt to collect the debt against you, the IRS may have filed what is known as a secure tax lien. This means they have placed a legal claim on all of your property. If the IRS takes this step and files a tax lien against you before you file bankruptcy, that lien takes precedence over your bankruptcy. Even property that was otherwise exempt in the bankruptcy cannot be sold or transferred unless the tax lien is paid first. You will receive no relief from filing bankruptcy if this is your situation.

Are Taxes Handled Differently Under Chapter 7 or Chapter 13?
If the requirements are met to enable you to have your past due income taxes included in your bankruptcy, they will be handled equally under either form of bankruptcy. If you file Chapter 7, your eligible taxes will be discharged along with the rest of your dischargeable debts when the bankruptcy is finalized. If you are filing Chapter 13, the remaining taxes owed will be eligible for discharge at the end of your Chapter 13 plan.

Should you file bankruptcy to help eliminate income tax debt? Talk to an experienced bankruptcy attorney to determine if bankruptcy is the right step for you.