Discharging Tax Debts in Bankruptcy

 In Tax News

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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