The Dischargeability of Income Taxes In Bankruptcy

Written by Adam Peck Category: Nursing Homes January 23rd, 2013 3 min read

The two common types of bankruptcy for individuals are Chapter 7 (liquidation) and Chapter 13 (readjustment of debts). Although each are governed by their own set of requirements and conditions, tax debts are generally treated similarly under both proceedings. However, the basic concepts behind each bankruptcy type will dictate how the debts are settled.

In general – under Chapter 7 -if the debts meet all of the conditions below, then they can be discharged during the bankruptcy proceedings, but if even one qualification is not met, then the debts will remain after the bankruptcy. However – under Chapter 13 – there is almost always a distribution to creditors. Therefore, the court appointed trustee must negotiate with the IRS and decide on a settlement.

Qualifications for Discharge

Although many taxpayers are under the impression that tax debts cannot be discharged, some actually can! However, in order for tax debts to qualify to be discharged, they must meet a hefty list of requirements. According to bankruptcy laws, the follow conditions must be met:

1. Tax Return Filed
Even if you are unable to pay the taxes due, you must still file a tax return before a tax debt can be considered for discharge. Additionally, the tax return for the tax debt that you want discharged must have been filed at least two years prior to the bankruptcy filing, regardless of when the returns were originally due.

2. 3 Years Old or Older
In order to discharge a tax debt, it must be related to a return that was due at least three years ago. Therefore if you wanted to file for bankruptcy in 2010, then the tax debts you hope to have discharged need to have originated from the 2007 tax year or before. This limit also includes any automatic extensions you may have requested, so if you got a six month extension on your return, then it will add another six months to your wait time before you can file for bankruptcy.

3. IRS Assessed
In order to have a tax debt discharged through bankruptcy, the IRS will need to have assessed it at least 240 days prior to you filing for bankruptcy.

4. Income Taxes Only
Unfortunately, income taxes are the only kind of tax debt that can be discharged through bankruptcy. Other tax debts such as unpaid employer payroll taxes, and trust fund recovery penalties cannot be discharged.

5. No Fraud Allowed
Last but certainly not least, the income tax debt incurred must not be related to any fraudulent activity. If you have willfully tried to evade taxes and were convicted of tax evasion, then you will not be allowed to have your debts discharged through bankruptcy.

Tax Returns

Before your bankruptcy will be approved, you will need to provide both the judge and any creditors who request a copy of your most recent tax return. You will also need to provide the court with proof that your four most recent tax returns have been filed with the IRS no later than the date of the first creditors’ meeting.

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Written by Adam Peck

Expertise: Personal Injury

Adam J. Peck, ESQ is a principal with Peck Law Group, APC. In 2008, Mr. Adam Peck received his Juris Doctorate from Whittier Law School where he graduated Cum Laude. His practice is primarily dedicated to representing Elders, Dependent Adults, along with their loved ones and family members, who have suffered horrific personal injuries.