For debtors who owe unpaid taxes, bankruptcy may offer some relief by discharging some or all delinquent taxes. However, it’s important to understand under what circumstances you can discharge tax debt in bankruptcy. Let’s take a look at the rules for discharging tax debt in bankruptcy.
Forgiven or Repay
Since most tax debts are priority debts, they cannot be discharged in bankruptcy, and filing Chapter 13 bankruptcy usually means that you’ll be required to repay them over the course of three to five years. However, there are exceptions, and you may be allowed to wipe out all of your tax debt.
Old Taxes vs. New Taxes
Recent taxes are not dischargeable in bankruptcy. Only tax debt that became due at least 3 years before your bankruptcy filing may be eligible for discharge, and that’s only true if they are income taxes. If they are payroll taxes, fraud penalties, or if you’ve been convicted of tax fraud or evasion, you will not be allowed to discharge your tax debt in bankruptcy. Tax debt assessed by the IRS within 240 days before your bankruptcy filing also may not be eligible for a discharge.
If you did not file a tax return, your tax debt will not be eligible for a bankruptcy discharge. If you filed a tax return late (after its due date and/or after an extension expired) in some jurisdictions you may be ineligible for discharge on those taxes. In jurisdictions that allow discharges on taxes that have a late return, that return must have been filed at least two years before you filed bankruptcy. So if you owe taxes for 2010, you must have filed a tax return for that year (2010) by 2013 to be eligible for a discharge in a 2015 bankruptcy filing.
Tax liens generally cannot be discharged in bankruptcy. If a tax lien was filed on your property before your bankruptcy, you may still need to pay the tax if you sell the property on which the tax lien is filed.
Handling taxes in a bankruptcy case is complex, so make sure you’re working with an experienced bankruptcy attorney that can protect your interests.