Tax debt can’t usually be wiped out, or discharged, by filing bankruptcy unless it is old and you meet some very specific requirements. It depends on when the tax return was filed and what kind of tax debt you owe.
Tax debt is one of the hardest to deal with, and the IRS has a lot of power when it comes to trying to collect. Even if your tax debt can’t be wiped out with a bankruptcy, a Chapter 13 may be able to help you with a repayment plan. In any case, tax debt in bankruptcy is very complex and you should talk to an experienced attorney.
Taxes That Can Be Discharged In Bankruptcy
Taxes can be discharged in bankruptcy if they meet all of these requirements:
1. The tax return had to be due more than 3 years ago.
2. The tax return had to be filed more than 2 years ago.
3. The tax had to be assessed more than 240 days ago.
4. The tax that is owed is an income tax.
5. The tax is not the result of a fraudulent tax return or willful tax evasion.
Suppose you are filing bankruptcy on January 5, 2013. If you owed income taxes for a tax return that was due on April 15, 2009, those taxes will be dischargeable because January 5, 2013 is more than 3 years after April 15, 2009. If you filed that return on April 12, 2009, those taxes will be dischargeable because, the bankruptcy is more than 2 years from when the tax return was filed.
Taxes are assessed when the IRS says you owe the money. This may be some time after you file your return because it takes time to process each return. If the IRS said the money was owed on July 1, 2009, this is more than 240 days before January 5, 2013, so the tax that is owed would be discharged. As long as the tax return was not knowingly false such that you were trying to pay less than you actually owed, then all 5 rules are met and the tax would be discharged.
For most taxes, if you owe tax, you also owe penalties and interest. The general rule is that if the tax can be discharged, so can the penalties and interest. Again, you have to meet the requirements for the tax to be dischargeable for the penalties and interest to be discharged.
The timing requirements can be affected by things like an intervening bankruptcy filing and an offer in compromise. You should consult a knowledgeable bankruptcy attorney to make sure the timing requirements are met for a tax debt to be discharged.
Some kinds of taxes are never dischargeable, such as sales tax or payroll taxes, or if you have not filed a return. If you owe this kind of tax debt, you might want to look at filing a Chapter 13. A knowledgeable bankruptcy attorney will be able to tell you what kind of bankruptcy is best for your specific situation.
Different Rules For Federal Tax Liens
Sometimes the IRS will put a lien on your property for taxes that you owe. A federal tax lien attaches to all real estate and all personal property that you own. If you owe a tax debt that would be dischargeable because it meets the 5 requirements listed above, if the IRS has filed a lien, you won’t have to personally pay the debt, but the lien will stay on your property. If you want to sell the property, you will have to pay the IRS in order to do so. In this case, a discharge alone might not be enough. You might want to file a Chapter 13 so that that the lien can be paid and the lien released.
Chapter 13 Can Help For Taxes That Can’t Be Discharged
For taxes that don’t meet the 5 requirements listed above, or if a tax lien has been filed, Chapter 13 can be a good option to help pay those taxes. In a Chapter 13, you will enter into a repayment plan that lasts 3 to 5 years. If you have a tax lien on a debt that would otherwise be dischargeable, a Chapter 13 might let you pay back only a part of that tax lien, and still get the lien released at the end.
Taxes that can’t be discharged because they don’t meet the 5 requirements are usually priority debts in a Chapter 13. Priority debts get paid in full through a Chapter 13, but the repayment plan is spread out and based on how much you can actually afford to pay when taking into account reasonable living expenses. It is important to consult a knowledgeable attorney who can help you decide if a Chapter 13 can help with your specific tax situation and how much of your tax debt would have to be repaid.
Questions for Your Attorney
• Can the taxes I owe be discharged?
• Can I make the taxes I owe be dischargeable by waiting to file my bankruptcy case?
• Would a Chapter 13 bankruptcy be a better option to handle my tax debt?