Are Income Taxes Dischargeable in Bankruptcy?

Are Income Taxes Dischargeable in Bankruptcy?

Income taxes may be discharged in bankruptcy if certain requirements are met.  Most people mistakenly believe that taxes are never dischargeable in a bankruptcy. This myth is absolutely wrong! Although there are certain criteria that must be met, bankruptcy relief is often the best way to solve a serious tax problem and stop IRS collection activity. The filing of a bankruptcy case automatically and immediately stays (stops) IRS bank account levies and wage garnishments, and enables the taxpayer to either obtain a discharge or reorganize his or her tax liabilities.

The IRS is not just any creditor because it has the ultimate power to do things other creditors cannot do. However, if you hire a lawyer before the situation gets worse, there are options and possible solutions available.

Each type of bankruptcy treats IRS tax debts differently. The two most common forms of bankruptcy in getting rid of or repaying IRS tax debts are Chapter 7 and Chapter 13.

Tax Debts in Chapter 7

To qualify for an income tax debt discharge, all of the following must be satisfied:

  1. Your tax returns must have been due three years or more before the petition was filed;
  2. Your tax returns have to have been filed more than two years before the petition;
  3. The tax you owe must have been assessed against you by the government for at least 240 days before the case is filed or no assessment yet made by the IRS;
  4. Your tax returns must have been truthful and not fraudulent; and,
  5. You must not have been intentionally attempting to evade or defeat the tax when you failed to pay.
  6. The IRS has not recorded a lien on your property for the tax assessment made.

For example you owe income taxes to IRS for $11,000 for the year 2008 which you filed a return on 4/15/2009.  The IRS made an assessment on August 1, 2011 but did not put a tax lien on your property.  You filed bankruptcy on April 30, 2012.  If you analyze this information, the taxes due are more than 3 years since 4/15/2009.  The date of filing tax return is 4/15/2009 which is more than two years before filing petition for bankruptcy on 4/30/12.  The tax was assessed more than 240 days since 8/01/2011 and there was no lien made on your property.  If the return is not fraudulent and you are not attempting to evade the tax you may be able to discharge the tax of $11000 and all penalties based on this example.

Tax Debts in Chapter 13

If you are not qualified to file for a Chapter 7 or have decided that Chapter 13 is your best option, non-dischargeable tax debts can be included in your repayment plan. In addition, bankruptcy’s automatic stay applies to the IRS as well, meaning all collection efforts pending against you will be stopped. Filing for Chapter 13 will also accomplish two other very important things:

  1. Penalties that the IRS has tacked on your tax debt will be discharged, and
  2. No new penalties or interest will accumulate while you are in Chapter 13.

In short, you may pay considerably less money to the IRS by going through bankruptcy than you would if had tried to work out a debt settlement agreement with them on your own.

Note:   This is not a legal advice.  The Law Office of Crispin Caday Lozano can help in discharging income tax debts in bankruptcy.

Toll Free 1-877-4LOZANO for free consultation or Schedule an Appointment