Bankruptcy and Taxes

Some people decide to file for bankruptcy for the sole purpose of getting rid of their tax debts. They need to check with a bankruptcy attorney to verify the benefit they will receive and under which chapter they should file.

Chapter 7 bankruptcy and taxes

Chapter 7 provides for the discharge of certain taxes if the following criteria are met:

• Only income taxes are dischargeable.
• All outstanding tax returns must be filed prior to the time you file your bankruptcy petition.
• There must be no fraud involved and you did not intentionally evade paying your taxes.
• The tax debt arises from a return that was due at least three years prior to your bankruptcy filing.
• At least two years prior to your bankruptcy filing, you filed the tax return or returns that give rise to the debt you want to have discharged.
• The tax was assessed by the IRS at least 240 days prior to your bankruptcy filing date.

You must provide proof to the bankruptcy court that your last four tax returns have been filed and that they were filed prior to the date you filed your bankruptcy petition. If the tax was assessed by the IRS but you did not file a return, those taxes are not dischargeable.

Chapter 13 bankruptcy and taxes

The same rules for having income taxes discharged apply to Chapter 13 as apply to Chapter 7. The difference is that the taxes are included in the repayment plan under Chapter 13 reorganization rules. At the end of the repayment period, either three to five years, if you have made all the payments and complied with all the conditions of your reorganization plan, the remaining tax debts will be discharged.

A bankruptcy discharge of tax debt does not remove tax liens

The IRS or state franchise board may have filed a tax lien against your property. The discharge of the tax debt in bankruptcy does not remove the tax lien. There may be ways to petition the IRS to remove the lien, but it is important to note that this is a separate proceeding and not part of the bankruptcy process.