Discharging Tax Debts in Bankruptcy

Posted April 13, 2011

Most tax debts cannot be discharged in bankruptcy. For most, you will continue to owe the tax debt after a Chapter 7 bankruptcy, or you will have to repay them in full in a Chapter 13 bankruptcy repayment plan. However, it is possible to wipe out federal income tax debts in Chapter 7 bankruptcy if your debts qualify for discharge and you are eligible for Chapter 7 bankruptcy. In order for your federal income tax debts to qualify for discharge, all of the following must be true:

The tax debt is for income taxes.
The taxpayer is not guilty of willful evasion or fraud.
The tax return for the debt was originally due at least 3 years prior to the bankruptcy filing.
The tax return for the debt was filed at least 2 years prior to the bankruptcy filing.
The debt was either assessed by the IRS at least 240 days prior to the bankruptcy filing, or has not yet been assessed. (The 240-day time limit may be extended in certain circumstances.)

Please note that bankruptcy will not wipe out prior recorded tax liens. A Chapter 7 bankruptcy may wipe out your personal obligation to pay the tax debt, but if the IRS recorded a tax lien on your property prior to the bankruptcy filing, the lien will remain on the property.

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Hone Maxwell LLP

At Hone Maxwell LLP we concentrate on the full spectrum of federal, state, and local tax issues, including tax planning and tax controversies involving both civil and criminal claims. As attorneys with a public accounting background, we are able to understand the underlying issues, questions, and laws as well as effectively represent our clients and assist them in achieving their goals.