Taxes and Bankruptcy

It is possible that income tax debt can be discharged under Chapter 7 bankruptcy or Chapter 13. However, whereas Chapter 7 offers debtors a full discharge of allowed debts, Chapter 13 requires the creation of a payment plan to repay debt. Under current bankruptcy laws, tax debt is to be treated the exact same way under both chapters. Not all of a person’s tax debt can be discharged. There are five specific rules to discharge a tax debt. If a person meets all five rules, the tax debt can be discharged:

·    The tax debt needs to be related to a tax return due a minimum of three years prior to the filing for bankruptcy. Included in the due date is all extensions.

·    The tax debt needs to be related to a tax return filed a minimum of two years prior to the filing for bankruptcy. This time is measured from the date the tax return was filed.

·    The IRS needs to show that they assess the tax a minimum of 240 days prior to the filing of bankruptcy. This assessment may be because of a balance due or an audit.

·    There are no instances of fraud in the tax return.

·    The debtor is not guilty of intentionally evading any tax laws.

Any tax debts the result of unfiled tax returns cannot be deemed dischargeable.

When petitioning for bankruptcy, individuals need to provide copies of the most recently filed tax return to the court. Credits are allowed to request a copy of this if they want.