We receive questions from clients about eliminating tax debts in bankruptcy on a regular basis. Owing the IRS is a frightening and frustrating experience because it can seem as if no matter how hard you try, you never get out from under your IRS debt. The interest and penalties alone can quickly add up to more than the actual tax debt, making it impossible for most individuals to pay it off. When dealing with the IRS becomes too overwhelming, people turn to us for help.
Unfortunately, most tax debts cannot be discharged by filing bankruptcy. If you file a Chapter 7 bankruptcy case, you will continue to owe the tax debts after your bankruptcy case has been discharged. Some debtors are able to repay their tax debt through a Chapter 13 plan; however, because you must repay all taxes owed, it can cause the monthly plan payments to be high.
The good news is that taxes are non-dischargeable in “most”, but not all cases. There are cases where eliminating tax debts in bankruptcy are allowable. Below you’ll find the circumstances for these cases:
Eliminating Tax Debts in Bankruptcy by Filing a Bankruptcy Case
If tax debt is a problem, you should see if a bankruptcy will discharge your tax liability. The first step in eliminating tax debts in bankruptcy is to meet with an experienced bankruptcy attorney to discuss this.
In determining if your tax debts qualify for discharge under the Bankruptcy Code, you must meet all five of the following requirements:
- The taxes in question must be income taxes.
Eliminating tax debts in bankruptcy is only applicable to income taxes. Payroll taxes, sales taxes and penalties for fraud are non-dischargeable in bankruptcy.
- The debtor must not have committed fraud or evaded taxes.
A debtor who has willfully evaded paying taxes such as using a false Social Security Number is not eligible for a discharge of his or her taxes. Likewise, if a debtor filed a fraudulent tax return (i.e. claiming dependents that do not exist), the taxes cannot be eliminated through the filing of a bankruptcy case.
- The tax return must have been due for at least three years.
The taxes due must have been due at least three years prior to filing the bankruptcy petition. You cannot discharge taxes that became due less than three years prior to filing your bankruptcy case.
- The return must have been filed at least two years ago.
In order to eliminate your tax debt, you must have filed the tax return that established the tax debt at least two years prior to the filing of your bankruptcy case.
- The tax liability must have been assessed more than 240 days ago.
In order to discharge taxes in a bankruptcy case, the tax debt must have been assessed by the Internal Revenue Service at least 240 days prior to the filing of the bankruptcy petition or must not have been assessed yet. Because this time limit may be extended by certain actions of the IRS, an experienced bankruptcy attorney will need to review the history of the tax debt in order to determine if you meet the 240-day rule.
If you are struggling with overwhelming tax debts, meet with an attorney to go over your situation to see if you are eligible for a discharge of taxes through bankruptcy. If not, there are other options that can be discussed to give you the relief that you need in order to get your feet back under you as you recover from a financial hardship.
Ready to Eliminate Tax Debt?
There is help available when you are ready. We are here to help sort out whether you are eligible for a tax debt discharge, or if there are other options that could work for your situation. Request a consultation to begin discussing your situation with an experienced bankruptcy attorney.