You are currently viewing Can You Discharge Taxes In Bankruptcy?

Can You Discharge Taxes In Bankruptcy?

Dealing with tax debt can be overwhelming, and many wonder if bankruptcy can offer a solution. Discharging taxes in bankruptcy is possible under certain conditions, but it is a complex area of law with specific requirements. 

Understanding Tax Debt In Bankruptcy

Bankruptcy can help manage or eliminate certain tax debts, but not all taxes are dischargeable. The type of bankruptcy filed (Chapter 7 or Chapter 13) also influences how tax debts are treated.

Eligibility For Discharging Taxes

For taxes to be dischargeable in bankruptcy, several criteria must be met:

1. Income Tax Debt: Generally, only income taxes are eligible for discharge.

2. Timely Filed Returns: Tax returns for the debt in question must have been filed at least two years before the bankruptcy filing.

3. Tax Assessment Date: The tax debt must have been assessed by the IRS at least 240 days (about 8 months) before filing for bankruptcy.

4. Non-Fraudulent Returns: The tax returns associated with the debt must not be fraudulent or guilty of tax evasion.

Chapter 7 Bankruptcy And Taxes

In a Chapter 7 bankruptcy, also known as a liquidation bankruptcy, you can discharge eligible tax debts completely, subject to the criteria above. However, if the IRS has placed a lien on your property before you file for bankruptcy, the lien will remain. This means that you may still have to pay off the lien to clear the title to your property.

Chapter 13 Bankruptcy And Taxes

Chapter 13 bankruptcy, or reorganization bankruptcy, allows you to include your tax debts in a court-approved repayment plan, typically spanning three to five years. While you may not completely eliminate your tax debt, Chapter 13 can make it more manageable.

Non-Dischargeable Taxes

Certain taxes cannot be discharged in bankruptcy, including:

– Recent Tax Debts: Taxes for recent tax years are generally not dischargeable.

Trust Fund Taxes: Taxes withheld from an employee’s paycheck, like FICA and Medicare, cannot be discharged.

– Penalties and Interest: While some penalties and interest may be dischargeable, others related to non-dischargeable taxes will remain.

Considerations And Next Steps

– Evaluate Your Situation: Assess the types of tax debts you have and their assessment dates.

– Seek Professional Advice: Consult with a bankruptcy attorney who understands the intricacies of discharging tax debts. Resolve Law Group has years of experience and knowledgeable attorneys that can help you. 

– Gather Documentation: Prepare your tax records, including returns, assessments, and any correspondence with the IRS.

While discharging taxes in bankruptcy is possible, it requires meeting specific criteria and navigating complex legal rules. Understanding the types of taxes that can be discharged, and under what circumstances, is crucial for anyone considering bankruptcy as a solution to tax debts. Professional legal advice is invaluable in these situations, providing guidance tailored to your unique financial circumstances. Contact a bankruptcy lawyer today to determine your next steps.