Unfortunately, most tax related debts cannot be discharged (wiped out) from filing bankruptcy. You generally will continue to owe even at the end of your Chapter 7 bankruptcy case. Or if you file Chapter 13, you will have to repay your taxes in full, in a Chapter 13 bankruptcy repayment plan.
However, if you want to try to wipe out your tax debt, then Chapter 7 bankruptcy, if you qualify, would be the way to go. You can discharge debts for federal income taxes, (in Chapter 7 bankruptcy) if all of the following conditions are true:
- The taxes must be income taxes. Taxes on anything other than income, can never be eliminated in bankruptcy, i.e. payroll taxes, or for fraud penalties.
- You did not commit fraud or willful evasion. If, however, you filed a fraudulent tax return, or were willfully attempting to evade paying your taxes, then the bankruptcy proceedings will not help.
- The debt must be at least 3 years old (that is, it must have been due 3 years or more before you filed for bankruptcy).
- You must have filed a tax return for the debt you wish to wipeout, at least 2 years before filing for bankruptcy. However, there is a stipulation, in most courts, if you filed a late return (for example your extensions have expired and the IRS filed a substitute return on your behalf), this is not considered a filed “return”, for these purposes and therefore, you cannot get the tax discharged. Although, in some courts, you can discharge tax debt, that is the subject of a late return, as long as you meet the other criteria.)
- You must pass the “240-day rule.” This means the income tax debt would have been assessed by the IRS at least 240 days before you filed your bankruptcy petition, or must not have been assessed yet. (This time limit may be extended if the IRS suspended collection activity due to an offer made in a compromise or previous bankruptcy filing.)
If a tax debt is discharged in bankruptcy, then so is interest on the debt, and in some cases, any related penalties. Consult an experienced bankruptcy attorney to see if you qualify, you’ll be glad that you did!
outcome when facing bankruptcy.
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Please note: The hiring of an attorney is an important decision that should not be based solely on advertisements. Further, prior results do not guarantee a similar outcome. The laws change. Each case is different. This blog and website is designed for general information only. The information presented on this site is neither formal legal advice nor the formation of a lawyer/client relationship.