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Can A Bankruptcy Case Eliminate a Tax Debt?

A bankruptcy case will discharge most—but not all—of a person’s debts. There are some debts, known as non-dischargeable debts, which a person will still owe even after the bankruptcy case is over. In most cases, tax debts are non-dischargeable debts; however, there are exceptions.

In order to discharge a tax debt in a Chapter 7 bankruptcy, the debt must meet certain criteria. First, the debt must be based on a person’s income. State and federal income tax debt is the only type of tax debt which is potentially dischargeable in a Chapter 7 case.

Next, the tax debt must be from a tax return that was due at least three years prior to the bankruptcy. So, if you were to file bankruptcy in 2016, only tax debt from 2012 and prior years will count. Additionally, the return must have been filed at least two years ago. For instance, if you owe tax debt from 2005 but never filed taxes for that year, you must wait two years from the date the tax return was filed to include that debt on a Chapter 7 bankruptcy petition.

The IRS must also have assessed the taxes at least 240 days prior to the bankruptcy. This waiting period gives the IRS time to investigate the return and object to the discharge if necessary. Even if the tax return was filed over two years ago and the debt was due more than three years ago, the IRS may not yet have processed the return. Once the return is processed and the taxes are assessed, the IRS will have 240 days to collect before the taxpayer can file for bankruptcy.

Finally, the taxpayer/debtor will not be able to discharge the tax debt if he or she is guilty of tax fraud or tax evasion.

It is important to note that discharging a tax debt will not resolve a tax lien. If the IRS has placed a lien on your home or vehicle due to unpaid taxes, filing for bankruptcy and discharging that debt will still not dissolve the federal lien. In order to get clear title to that piece of property, you will still have to pay off the tax debt or negotiate another resolution.

If you are concerned about your tax debt and are contemplating bankruptcy, contact the attorneys at Loan Lawyers today. We will review your individual circumstances in a free consultation, and will help you create a plan to get out of debt. To schedule an appointment, contact us today by calling (888) FIGHT-13 (344-4813).
Categories: Bankruptcy
  • ABC News
  • American Civil Liberties Union
  • CBS 4
  • CNN
  • Daily Business Review
  • Florida Trend's - Florida Legal Elite 2014
  • Florida Trend's - Florida Legal Elite 2014
  • National Association of Consumer Advocates
  • National Association of Consumer Bankruptcy Attorneys
  • NBC News
  • National Consumer Law Center
  • The New York Times
  • Avvo
  • Avvo
  • Avvo
  • Avvo
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