Will Bankruptcy Eliminate Federal Tax Debt?

Chapter 7 bankruptcy can eliminate certain federal tax debts, but there are specific conditions that must be met for the tax debt to be dischargeable. Not all tax debts can be wiped out in bankruptcy, so it’s crucial to understand the qualifications:

Conditions for Discharging Federal Tax Debt in Chapter 7:

1. Income Tax Debt: Only federal income taxes can be discharged. Other types of taxes, like payroll taxes or fraud penalties, cannot be eliminated through Chapter 7.
2. Three-Year Rule: The tax debt must be for a tax return due at least three years before you file for bankruptcy. Extensions can affect this timeline.
3. Two-Year Filing Rule: The tax return associated with the debt must have been filed at least two years before you file for bankruptcy. This means if you filed late, you need to wait at least two years from the date you filed the return.
4. 240-Day Assessment Rule: The IRS must have assessed the tax debt at least 240 days before you file for bankruptcy, or not have assessed it yet. This period might be extended if there was an offer in compromise between the taxpayer and the IRS or if the taxpayer had a previous bankruptcy case.
5. No Fraud or Willful Evasion: The tax return cannot be fraudulent or guilty of willful evasion. If the IRS determined that you attempted to evade paying taxes or committed fraud on your tax return, the debt is not dischargeable.

Non-Dischargeable Tax Debts:

• Tax penalties from tax debts that are not dischargeable
• Tax debts from unfiled tax returns
• Trust fund taxes or payroll taxes
• Certain property taxes
• Debts from tax evasion or fraud

Steps to Take:

1. Consult with a Bankruptcy Attorney: If you’re considering filing for Chapter 7 and have significant tax debt, it’s crucial to consult with a bankruptcy attorney who has experience with tax issues. They can help determine if your tax debts may be dischargeable.
2. Obtain a Tax Transcript: To confirm your tax debt meets the discharge criteria, you might need a tax transcript from the IRS. This document will show when the tax was assessed, which is vital for the 240-day rule.
3. Consider Timing: If your tax debts are nearing the time frames outlined in the dischargeability rules, it might be beneficial to wait to file for bankruptcy to maximize the amount of tax debt that can be discharged.

While Chapter 7 bankruptcy can provide relief from certain federal tax debts, it’s subject to stringent rules. Understanding these rules and planning accordingly can help you make informed decisions about addressing tax debts through bankruptcy. Always seek professional advice to navigate this complex area effectively.

Federal Tax Debt