Tax Dischargeability in Bankruptcy

If you have an income tax debt, and are filing for bankruptcy, it may be eligible for discharge under Chapter 7 or Chapter 13 of the Bankruptcy Code. 

The difference between a Chapter 7 bankruptcy and a Chapter 13 bankruptcy is that Chapter 7 allows for a full discharge of permitted debts while Chapter 13 issues a payment plan to repay some debts, with the rest of the permitted debts being discharged. Keep in mind, not all tax debts are able to be discharged in bankruptcy, but taxes that are eligible to be discharged in a Chapter 7 are also eligible for discharge in Chapter 13. When you file for bankruptcy, your tax debts must meet a certain criteria in order to be discharged. 

The criteria are:

• All tax debt must be from income taxes

• The tax debt must be part of a tax return that was due at least three years prior to the taxpayer filing for bankruptcy. The due date includes any extensions.  

• The tax return has to have been filed at least two before the taxpayer files for bankruptcy. This date starts when the return was actually filed.

• The tax assessment that the IRS sent you has to be at least 240 days old.

• The tax return cannot be fraudulent.

• The taxpayer cannot be guilty of tax evasion.

• You must also prove to the court that you filed tax returns for the past four years. 

Some of the tax debts that are not dischargeable are those that have not been filed. While the IRS routinely assesses taxes on unfiled returns, these tax liabilities cannot be discharged until the taxpayer files a return for the year in question. 

If you file for Chapter 13 bankruptcy, money owed to the IRS that does not meet the qualifications to be discharged can be repaid through a payment plan that lasts anywhere between three and five years without interest or penalties. One of the benefits of filing a Chapter 13 bankruptcy is if the IRS rejected your previous payment plan, this is a way to get them to accept one.

It is recommended that you speak with your attorney regarding this matter before deciding between filing Chapter 7 or Chapter 13 to get rid of or aid with the burden of tax debt.