Discharging Income Taxes in Bankruptcy
Of all debts, back owed taxes are the scariest. The thought of IRS collection, combined with the tendency of income taxes to accrue interest, is frightening. Debtors often need to discharge back owed taxes to help them get the fresh start they need. On the other hand, the government has an interest in making sure that it gets paid taxes that are owed to it. The bankruptcy code strikes a balance between these two interests.
When Tax Debts Can be Discharged
Taxes that are due more than three years from the filing of the bankruptcy can be discharged in the bankruptcy. Additionally, only standard income taxes can be discharged. Other kinds of taxes, such as property taxes, employment taxes, sales taxes, payroll taxes, or other non-income taxes, can never be discharged.
As you may imagine, you cannot discharge any tax incurred in, or as a result of, a fraudulent tax return. If it is found that you put something false in a tax return in an effort to evade taxes, the debt won’t be dischargeable.
To discharge taxes, you also must have filed a tax return at least two years prior to the bankruptcy filing. Filing late returns, or returns where a substitute form is filed on your behalf, does not count as a filing.
There is also what is known as “the 240-day rule.” This rule says that the tax debt must either be unassessed at the time of the bankruptcy filing, or if assessed, it must have been assessed by the IRS at least 240 days prior to the filing of the bankruptcy. Remember that sometimes the IRS can take awhile before assessing penalties, and thus, you should speak to a qualified bankruptcy attorney to see if your taxes are dischargeable.
Remember that even if your tax burdens are dischargeable, the liens they create survive bankruptcy, just like any liens (such as a mortgage or a car loan). That means, for example, that a tax lien assessed on your property will survive the bankruptcy, even though the IRS may not be able to ever collect the lien from you personally.
Taxes in Chapter 13
If the tax debt would be dischargeable in Chapter 7, it will be treated just like credit card debt if you file a Chapter 13. Part of the debt will be included in the repayment plan, and at the end of the plan, the debt will be discharged.
If the tax debt would not qualify for discharge, then it will have to be paid back in full. The amount owed will be divided into each payment made over the plan, which at least allows a consumer to repay the tax lien over a reasonable period of time. This can make repayments much easier for consumers to handle.