Attorney Kristy Hernandez
Can I Wipe Out Tax Debt in Bankruptcy?
Updated: Oct 24, 2018
One of the most crushing debts that clients face is the burden of taxes. The IRS is scary to many clients, and the tax debt is often so big that clients have no idea how to tackle it. This means that I spend a lot of time talking to clients about whether bankruptcy is a solution to tax debt problems. So, does bankruptcy wipeout tax debt? Maybe…
Leave it to lawyers and the federal government to not be able to give a straight answer to this question! Unfortunately, in order to be eligible to wipe out a tax debt, there are five criteria that must be satisfied.
You can discharge Federal income or State income taxes in Chapter 7, Chapter 13 or Chapter 11
bankruptcy only if all of the following conditions are true:
1. The taxes must be strictly for taxes on income. Taxes such as payroll taxes, trust fund
taxes, sales tax or fraud taxes cannot be eliminated in bankruptcy.
2. You have not committed fraud or willful tax evasion. You cannot wipe out tax debt if you filed a false or fraudulent tax return or willfully attempted to evade paying taxes. For example, if you under-reported income falsely, you cannot wipe out the debt after getting caught.
3. The debt must be at least three years old from the date it is due. In order to wipe out the tax debt, the bankruptcy cannot be filed until three years after the original due date of the tax. For example, if a tax was due from a 2005 tax return, the due date of that tax liability would be April 15, 2006. In this example you would have to wait until April 15, 2009 to file the bankruptcy in order to be eligible to discharge the IRS tax debt. Many times, you must be careful to wait the appropriate time period in order to ensure that the tax debt will be wiped out.
4. You had to file a tax return for that particular year two years before the bankruptcy. To be eligible to wipe out the debt, you must have filed a tax return for the IRS or State debt you wish to discharge at least two years before filing for bankruptcy. Thus, even if the debt is over three years old, if you filed the return late and two years has not yet passed, then you cannot wipe out the Internal Revenue Service or State tax debt.
5. You must satisfy the 240-day rule. The IRS must have assessed the income tax debt at
least 240 days before you file your bankruptcy petition, or must not have been assessed
yet. The IRS can extend this time period due to suspended collection activity because of
an offer in compromise or a previous bankruptcy filing.
Clients should be aware that different rules apply when the IRS has already placed a tax lien against them. A bankruptcy may relieve you of personal liability on a tax debt, but in some circumstances will not discharge a properly filed tax lien. After bankruptcy, the IRS cannot chase you personally for the debt, but the lien will remain on any assets so you will not be able to sell these assets without satisfying the outstanding lien. – this includes your home. Depending upon the lien and when filed, there may be other options to attack the validity of the lien.
If you are facing tax debt and are not sure if you will be able to pay it, we offer free bankruptcy consultations.