Discharging Tax Debt Through Bankruptcy

Many clients come to us under the mistaken belief that taxes may not be discharged in a Chapter 7 Bankruptcy. Though some taxes may never be discharged under Chapter 7 Bankruptcy (such as those withheld by an employer, or tax debt secured by property) income taxes may very well be discharged if three conditions are met.

The 3-Year Condition:

To discharge your income tax debt, the debt must have become due at least three years before you file your bankruptcy (11 U.S.C. § 507(a)(8)(A)(i)). Income taxes are generally due on the 15th of April. As I write this blog in early June, 2014 the deadline to file 2013 income tax returns (absent extensions) has already passed. Therefore, income tax debt attributable to 2013, 2012 or 2011 would not currently be dischargeable in a Chapter 7 Bankruptcy. Tax debt attributable to earlier years may be discharged if the other conditions are met.

The 2-Year Condition:

To receive a discharge of tax debt under a Chapter 7 Bankruptcy your tax returns must have been filed for at least two years. Even if you filed your return late, as long as two years have elapsed you will fulfill this condition (11 U.S.C. § 523(a)(1)(b)(ii)).

The 240-Day Condition

To receive a discharge of tax debt in a Chapter 7 Bankruptcy the tax debt you are seeking to discharge must have been assessed at least 240 days before you file your bankruptcy (11 U.S.C. § 507(a)(8)(A)(ii)).

In short, if the tax debt became due more than 3 years ago, your return has been filed for at least two years and the tax was assessed more than 240 days ago, you should be able to discharge any income tax debt in a Chapter 7 Bankruptcy. Interest and penalties attributable to the tax debt should be discharged as well. It is important to note that certain actions can affect the timeline for these conditions, so it’s important that you speak with an experienced bankruptcy attorney regarding your income tax debt.

Posted on January 25, 2016 .