Can I Eliminate Tax Debt in Bankruptcy?

Eliminating  Tax Debt in Bankruptcy

It is possible to have certain tax debt eliminated in bankruptcy but under special circumstances.  While you can include them in your bankruptcy filing along with other outstanding debt, in some cases, you’ll still be responsible for them at the end of a Chapter 7 bankruptcy or make payments on them as part of your Chapter 13 bankruptcy repayment plan. If you are looking to have tax debt discharged, Chapter 7 is a better option; only if they qualify.

There are certain conditions that apply for having tax debt be eligible for discharge:

  • Taxes have been accessed by the IRS within 240 days of your bankruptcy filing.  The timing could vary on this if an offer in compromise was made, the IRS suspended collection activity or you filed a previous bankruptcy.
  • Tax returns have been filed for the debt that you wish to have discharged.  Taxes should have been filed at least 2 years prior to your bankruptcy filing.
  • The tax debt in question should be at least 3 years old prior to filing.
  • The taxes should be income taxes.
  • Tax fraud or evasion has not been committed.  Tax returns previously filed should contain correct information.

Bankruptcy may prevent the IRS from garnishing your wages or seizing funds from your bank account (also known as a bank levy).  If you have a tax lien on your property, bankruptcy may not be able to remove it through a discharge.  You may qualify to pay off your tax debt through Chapter 13 in which, you could be required to pay all or a portion of your outstanding debt. Review your financial situation with a legal expert to determine if bankruptcy is the best option.