Bankruptcy and IRS Tax Debt
When Can You Discharge a Tax Debt?
You can discharge (wipe out) debts for federal income taxes in Chapter 7 bankruptcy only if all of the following conditions are true:
1. The taxes are income taxes. In Chapter 7, generally, only taxes based on wages, commissions or other income are eligible for discharge. Taxes other than income, such as payroll/employment taxes cannot be eliminated in bankruptcy.
2. The debt is at least three years old. To eliminate a tax debt, the tax return must have been originally due at least three years before you filed for bankruptcy.
For example, generally, taxes are due April 15 of every year. if your tax is from 2018, it would be due April 15, 2019. Three years from April 15, 2019 would be April 15, 2022. You would need to wait to file bankruptcy until after April 15, 2022 to discharge your personal tax obligation from 2018. Please keep in mind that filing for extensions would extend the due date for the taxes.
3. You did not commit fraud or willful evasion. If your return was fraudulent or frivolous, or you intended to evade the tax laws, the taxes due from that return will not be dischargeable. 1 U.S.C. 523(a)(1)(C)
4. You filed a tax return. Finally, you must pass the “240-day rule.” The income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet.
You Cannot Discharge a Federal Tax Lien
Filing Chapter 7 bankruptcy may help you eliminate your personal obligation to pay a tax debt. However, if the IRS recorded a tax lien on your property before you filed for bankruptcy, the lien will remain on the property. This means that before your property is sold, you will have to address the tax lien.
How to Find Information on the Taxes You Owe