You May be Able to Eliminate Tax Debt in Bankruptcy
It may surprise you to learn that, depending on the “age” of the tax debt and whether you filed a tax return for the taxes in question, you may be able to discharge federal income taxes in a chapter 7 bankruptcy.
What are the relevant factors in determining whether a tax debt is dischargeable?To be eligible to have these taxes discharged, you must meet the following conditions:
1. you filed a tax return for the relevant tax years at least two years before filing for bankruptcy;
2. the information on your tax return was correct to the best of your knowledge, and not intended to defraud the IRS;
3. the tax debt is from a tax return that was originally due at least three years before filing for bankruptcy;
4. the Internal Revenue Service (IRS) assessed the tax debt at least 240 days before you filed for bankruptcy. Note, however, that if you were negotiating your tax debt with the IRS, and as a result, they suspended collection activity, the applicable date may be extended for the period that collection activities were suspended; and
5. you did not do anything to intentionally evade paying the taxes, such as changing your name or its spelling, repeatedly failing to pay taxes, filing incomplete tax returns or hiding cash.
Is all tax debt dischargeable in bankruptcy?Not all tax debt is eligible for discharge in chapter 7 bankruptcy. Penalties stemming from tax debts that are ineligible to be discharged, likewise, are not dischargeable. Trust fund taxes, such as those an employer withholds from an employee’s taxes, also are not dischargeable. Additionally, even if your tax debt is discharged in bankruptcy, any federal tax liens placed on your property prior to filing your bankruptcy petition will remain. Thus, you will need to pay the lien off in order to clear title before you can sell the property.