Can Filing Bankruptcy Eliminate Tax Debt?

TRI Writer • January 9, 2020

Bankruptcy is supposed to protect consumers from excessive levels of debt. The process is designed to help overwhelmed consumers get a fresh start when financial obligations bury them. If one of the financial commitments involved is tax debt, you may have questions about whether or not it can be discharged.

No matter which type of bankruptcy you file , some debts are exempt from bankruptcy discharge. You can discharge unsecured debt like credit card debt, medical bills, personal loans, etc. Other debt like student loans, child support arrears, past due alimony, legal fines, etc. cannot typically be discharged.

What About Tax Debt? Can Tax Debt Be Discharged by Bankruptcy ?

Laws related to bankruptcy and taxes are complicated (from both directions). So it’s important that bankruptcy filers interested in learning more about how the bankruptcy court will handle their tax debt understand the details before they file. It’s also helpful to know how bankruptcy can affect your taxes during and after filing.

While some debts are never dischargeable, the rules for other types of debt (like tax debt) aren’t as black and white. Here are a few black and white, unarguable facts about tax debt and bankruptcy:

  1. Taxes you willfully attempted to evade cannot be discharged, provided the IRS proves its case.
  2. Penalties for tax fraud cannot be discharged.
  3. Income taxes are dischargeable only under extremely limited circumstances.
  4. Even if your tax debt is discharged, any tax lien the IRS recorded before you filed for bankruptcy would stay in place. This can make it impossible to sell the property unless the debt is paid.

For tax debt to be dischargeable, three elements must be satisfied:

  1. The tax debt in question must be at least three years old. For instance, 2018 taxes are due in April of 2019. So 2018 tax debt is not dischargeable until April 2022. This time period may be extended by the due dates of any extensions you may have filed.
  2. The bankruptcy filer must have filed their tax return for the tax debt owed, and the tax return must have been filed at least two years before the bankruptcy filing.
  3. Taxes must be assessed for longer than 240 days before the bankruptcy filing.

It’s always best to consult with an experienced local bankruptcy attorney before making any decisions about filing bankruptcy.

Do you have questions about filing bankruptcy, or about bankruptcy’s potential effect on your tax debt? The experienced Tennessee and Georgia bankruptcy attorneys at Kenneth C. Rannick P.C. can help. We help good people through bad times every day, and we can help you, too.

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