Your back taxes, interest and penalties can be wiped out by filing bankruptcy. If
you qualify, bankruptcy can be the best solution to resolve your crushing tax problems.
Unfortunately, not everyone qualifies to wipe out their tax debt in bankruptcy. Certain rules have to be
first. If you file bankruptcy and don't meet the rules, the IRS will still be in hot pursuit after your
bankruptcy is over.
Proper pre-bankruptcy planning is key to determining if bankruptcy is or can be a viable solution.
Eliminating Tax Debts in Bankruptcy
You may hear radio commercials offering the hope of eliminating tax debts in bankruptcy. But it's not as
it sounds. Most tax debts can't be wiped out in bankruptcy -- you'll continue to owe them at the end
of a Chapter 7 bankruptcy
case, or you'll have to repay them in full in a Chapter 13 bankruptcy
If you need to discharge tax debts, Chapter 7 bankruptcy will probably be the better option -- but only if
your debts qualify for discharge and you are eligible for Chapter 7 bankruptcy.
When You Can 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:
- The taxes are income taxes.
Taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy.
- You did not commit fraud or willful evasion.
If you filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes, such as using
a false Social Security number on your tax return, bankruptcy can't help.
- 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.
- You filed a tax return.
You must have filed a tax return for the debt you wish to discharge at least two years before filing for
bankruptcy. (In most courts, if you file a late return (meaning your extensions have expired and the IRS
filed a substitute return on your behalf), you have not filed a "return" and cannot discharge the tax. In
some courts, you can discharge tax debt that is the subject of a late return as long as you meet the other
- You 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. (This time limit may be extended if the IRS suspended
collection activity because of an offer in compromise or a previous bankruptcy filing.)
You Can't Discharge a Federal Tax Lien
If your taxes qualify for discharge in a Chapter 7 bankruptcy case, your victory may be bittersweet. This is
because bankruptcy will not wipe out prior recorded tax liens. A Chapter 7 bankruptcy will wipe out your
personal obligation to pay the debt, and prevent the IRS from going after your bank account or wages, but if
the IRS recorded a tax lien on your property before you file for bankruptcy, the lien will remain on the
property. In effect, this means you'll have to pay off the tax lien in order to sell the property.