Can my tax debt be discharged if I file bankruptcy?

Debtors often have various types of debts they would like discharged in bankruptcy, including tax debts. But whether your tax debt will be discharged will depend on several factors: the type of debt and whether you file Chapter 7 or Chapter13 bankruptcy.

Bankruptcy initiates an Automatic Stay

The good news is when you file your bankruptcy petition an automatic stay is initiated which stops most creditors, including the Internal Revenue Service, from their debt collection activities. The automatic stay may not, however, stop the collection of debts forever. For instance, some creditors will have the ability to ask the court for a relief from the stay. If granted, the relief will allow them to continue their debt collection efforts.

When is tax debt discharged?

Back tax debt may be discharged under very specific terms. For instance, according to bankruptcy laws, the following federal guidelines must be met before a personal income tax may be discharged in a bankruptcy case:

  1. The tax must be due and owed for a period of more than three years, and the due date of the taxes is more than three years before the bankruptcy case is filed.
  2. The tax return for the tax debt at issue must be filed more than two years before the bankruptcy is filed.
  3. The tax debt issue has been assessed by the taxing authority more than 240 days prior to the filing of the bankruptcy case.
  4. The debtor filing the return must not have attempted to evade the paying of the tax nor can the debtor filing be willfully fraudulent in submitting a return.

If your tax debt does not meet the requirements outlined above, it is considered a priority debt and cannot be discharged in bankruptcy.

Non-dischargeable tax debt and bankruptcy

Chapter 7 Bankruptcy

A Chapter 7 bankruptcy wipes out your dischargeable tax debts. Tax debts which are not dischargeable will remain at the completion of your bankruptcy and must be paid. Chapter 7 bankruptcy, however, may offer one benefit- it will provide temporary relief from tax collection efforts during the automatic stay. Unfortunately, the IRS generally can pursue their tax collection efforts within 4 to 6 months.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy may also be helpful if you have tax debts. For instance, although most tax debts are not dischargeable, Chapter 13 bankruptcy will allow you to include your back taxes in your bankruptcy repayment plan and repay your debts over a 3 or 5 year period.

Consider also, while you are completing your Chapter 13 bankruptcy the automatic stay will prohibit the IRS from collecting the tax debt outside of bankruptcy.

Resolving tax debt obligations without bankruptcy

Debtors who decide not to file bankruptcy may discuss their tax payment options with the IRS. The IRS offers many different payment plans to repay tax debts, including one of their most popular called an Offer in Compromise. Offer in Compromise allows the debtor to negotiate a tax settlement payment (sometimes for less) than the outstanding tax bill.

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