Understanding Tax Liability and Bankruptcy Discharge Eligibility
Are you considering bankruptcy and wondering if you will be able to have your tax debt discharged? As you might already know, the US Bankruptcy Code expressly identified debt “for a tax or a customs duty” as an exception to discharge. In other words, this type of debt is not eligible for discharge. However, you may meet the requirements for an exception to this specific exception to discharge if you are hoping to discharge personal income tax debt. Our West Palm Beach bankruptcy lawyers can tell you more, and we can begin working with you today on your bankruptcy filing.
Tax Debt is an Exception to Discharge, But There May be an Applicable Exception
As we explained above, the Bankruptcy Code lists tax debt as an exception to discharge. However, you may still be eligible to have your tax debt discharged if it meets very specific requirements.
To be clear, only personal income tax debt can be eligible. Payroll taxes and other types of business tax debt or tax penalties are definitively exceptions to discharge, and there is no exception to the exception.
Requirements for Discharging Personal Income Tax Debt
The only way that you can be eligible to have your personal income tax debt discharged under US bankruptcy law is if you meet all of the following requirements:
- Tax debt you owe is from federal income taxes;
- Tax debt you owe is at least three years old (meaning that it was due at least three years prior to the date you are filing for bankruptcy);
- Internal Revenue Service (IRS) assessed the income tax debt at least 240 days prior to your bankruptcy filing, which is known commonly as the 240-day rule;
- You filed a tax return for the tax debt you want to have discharged (either by the standard filing deadline or by an extension date that you received — your tax return cannot have been filed late); and
- You did not engage in fraud or willful tax evasion with regard to the return and tax debt you owe.
To be clear, if you know you will owe tax debt from 2025 (in your income tax filing due in April 2026), that tax debt will be ineligible for discharge even if you wait until after this year’s tax deadline to file. The tax debt must be at least three years old in addition to the other requirements listed above.
Contact Our West Palm Beach Bankruptcy Attorneys to Learn More About Your Tax Debt and Its Eligibility for Discharge
As one of the better known exceptions to discharge, tax debt can pose complications in some bankruptcy cases. However, it is important to keep in mind that your tax debt might actually meet the requirements for discharge. In other words, there may be an exception to the tax debt exception to discharge. To find out more about whether your tax debt can be discharged in a bankruptcy case, you should seek advice from an experienced West Palm Beach bankruptcy lawyer at Kelley Kaplan Delaney & Eller, PLLC, PLLC as soon as possible. Even if your tax debt cannot be discharged, but filing for a type of reorganization bankruptcy, you can usually reduce the stress and burden associated with this debt and repay it over time. Contact our firm today to find out more about how we assist individuals and businesses with bankruptcies in South Florida.
Source:
law.cornell.edu/uscode/text/11/523
