Discharging Tax Debt in Bankruptcy
October 28th, 2016 by Bunch & Brock
If you have outstanding tax debt and are facing serious financial problems, you may be considering the option to file for bankruptcy. However, if you’re hoping to have some or all of your tax debt discharged, it’s important to understand that contacting Bunch & Brock is probably your best bet because we analyze whether your tax obligations are dischargeable or not. Certain types of tax debts are dischargeable, while others are not. Even with that in mind, there are still a number of conditions and stipulations to be aware of when it comes to discharging tax debt as part of your bankruptcy declaration.
Understanding Priority vs. Dischargeable Debts
Some tax debts may be considered priority debts, which essentially means that they may survive bankruptcy and will not be discharged. However, all cases are unique and should be assessed on a case-by-case basis. There are certainly situations in which tax debts are not dischargeable if they satisfy the federal bankruptcy code section 523(a)(1)(A) or (B). Examples of other types of priority debts are child support/alimony/maintenance (domestic support obligations), claims for personal injury resulting from the debtor driving while under the influence and unpaid wages if the debtor is an employer. The concepts of priority and dischargeable debts can get confusing because they are not mutually exclusive.
Conditions That Must Be Met
Typically, there are several conditions that will need to be met in order for tax debt to be considered dischargeable in Chapter 7 bankruptcy filings. These conditions include:
- The debt is three years old (or older).
- A tax return was filed more than two years before the bankruptcy petition.
- It has been at least 240 days since the debt was assessed.
- No tax fraud or evasion was committed.
- Some courts require that the returns be timely filed.
- Tolling of the statute of limitations may extend the above dates.
- The taxes owed are income taxes.
You need to have proof that you filed your tax return timely and you may need to contact a CPA to obtain a tax transcript from the IRS.
Finally, if you have filed a fraudulent return or have attempted to evade your tax payments (such as by lying about your income or even using a false Social Security number on your return), the taxing authority may take the position that the above requirements have not been met to discharge the debt. Each case is different and Bunch & Brock suggests that you hire knowledgeable bankruptcy attorneys to review your case.
What About Federal Tax Liens?
It’s important to note that Federal tax liens are never considered for discharge under Chapter 7 bankruptcy. Therefore, if the IRS placed a tax lien on any of your properties prior to your filing bankruptcy, the lien will likely stay on the property. Although a tax lien may be released, it is a timely process and an attorney should walk you through it.
Now that you have a better idea as to what kinds of debt can and cannot be discharged through bankruptcy, hopefully you can contact Bunch & Brock to analyze your situation so you may make a well-informed decision as to which steps you should take next.