Can Tax Debt Be Eliminated In Bankruptcy? It All Depends …

Eliminating tax debt through bankruptcy is a complex area that requires careful consideration and understanding of various legal nuances. While not all tax debts are dischargeable in bankruptcy, certain types of tax liabilities can be eliminated under Chapter 7 or reorganized under Chapter 13 bankruptcy, provided they meet specific criteria.

Chapter 7 Bankruptcy and Tax Debt

Chapter 7 bankruptcy allows for the discharge of some older tax debts, subject to several stringent conditions:

1. Income Tax Debt: Generally, only income tax debts are eligible for discharge in Chapter 7. Other types of taxes, like payroll taxes or fraud penalties, are not dischargeable.
2. Three-Year Rule: The tax debt must be related to a tax return due at least three years before filing 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 the bankruptcy filing. This rule aims to ensure that taxpayers don’t evade their responsibilities by filing for bankruptcy immediately after submitting late tax returns.
4. 240-Day Assessment Rule: The IRS must have assessed the tax debt at least 240 days before you file for bankruptcy, or not at all. This period may be extended if there was an offer in compromise or a previous bankruptcy filing.
5. No Fraud or Willful Evasion: The tax return in question must not be fraudulent or guilty of willful evasion. If the IRS determines that there was fraud involved in the filing of the return or a deliberate attempt to evade paying taxes, the debt is not dischargeable.

Chapter 13 Bankruptcy and Tax Debt

Chapter 13 bankruptcy doesn’t eliminate tax debts in the same way as Chapter 7 but offers a way to manage these debts more feasibly:

1. Repayment Plan: Chapter 13 involves creating a repayment plan that lasts between three to five years, allowing the debtor to pay off the tax debt over time under more manageable terms.
2. Priority vs. Non-Priority Tax Debts: In Chapter 13, tax debts are categorized as priority (must be paid in full) or non-priority (can be treated like other unsecured debts and potentially not paid in full). Generally, recent income taxes are considered priority debts, while older taxes may fall into the non-priority category.
3. Stopping Penalties and Interest: Filing for Chapter 13 can stop additional penalties and interest from accruing on your tax debts, making it easier to pay off the balance.
4. Lien Stripping: If the IRS has placed a tax lien on your property, Chapter 13 might help remove or reduce the lien, depending on the equity in your property and the amount of your tax debt.

Seeking Professional Advice

Given the complexity of discharging tax debts in bankruptcy, it’s crucial to seek advice from a qualified bankruptcy attorney who understands the intricacies of tax law and bankruptcy proceedings. An attorney can evaluate your specific situation, determine if your tax debts may be dischargeable, and guide you through the bankruptcy process to achieve the best possible outcome for your financial future.

Tax Debt