It may be surprising to find out that there are certain scenarios where IRS tax debt can be discharged (eliminated). Or, your tax debt can be managed through bankruptcy. This will depend on a combination of factors, including under what chapter of bankruptcy you file. You should consider the age of the taxes, the taxes’ date of assessment, the dates the required returns were filed and if you willfully attempted to evade tax payment by fraud.
So, what are the requirements for a discharge of income taxes in bankruptcy? The minimum requirements for discharging federal or state income taxes are (all the following must be met):
- it has been more than 3 years since the returns were last DUE (including extensions) to be filed,
- the returns were timely filed or it has been at least 2 years since the returns were filed,
- there was no fraud involved or attempts to evade the tax, AND,
- the taxes were not assessed within the last 240 days.
However, there are many exceptions and events which can extend the above rules. So, you should not conclude without having transcripts analyzed by an attorney expert with tax discharge issues that your taxes will or will not be discharged in a case you file.
There are three main options when it comes to bankruptcy and each has its own advantages and disadvantages, so it is important to seek an attorney expert prior to filing for any bankruptcy.
Chapter 7 bankruptcy
This is the most common type of bankruptcy. It is primarily used for those who have income tax debt, but are unable to pay anything back. Chapter 7 can be a lifesaver for insolvency because it eliminates all dischargeable back tax debts. In other words, you pay nothing.
Even if you cannot get rid of your tax debt fully in a Chapter 7 bankruptcy case, you may be able to discharge some of it, and enter a more favorable repayment plan for the taxes than you otherwise could outside of bankruptcy in a Chapter 13 or Chapter 11 case.
Chapter 11 bankruptcy
This is available to every business. — whether organized as a corporation, partnership, or sole proprietorship. And, believe it or not, to individuals as well. Chapter 11 is more of a reorganization plan. Meaning, some debts will be repaid, some won’t be. The entity’s affairs will be run by a bankruptcy trustee, who balances the competing interests of creditors, including the IRS.
Chapter 13 bankruptcy
This allows for some tax debts to be wiped out and other taxes can be paid over the term of the bankruptcy plan without interest. There are several things to keep in mind with bankruptcy, such as failure to file returns and/or pay current taxes during your bankruptcy may result in your case being dismissed or you must continue to file during your bankruptcy — or get an extension to file at a later date — all required returns.