Can I Discharge Tax Debt in Bankruptcy?

Is tax debt dischargeable in bankruptcy? Generally the answer is no, however, there are exceptions to this rule. If the debt is not discharged then it will still be owed at the end of a chapter 7 bankruptcy or you’ll have to repay them in full in a Chapter 13 bankruptcy repayment plan.

Dischargeable Tax Debt

You can discharge debts for federal income taxes in Chapter 7 bankruptcy only if all of the following conditions are met:

1. The due date for filing a tax return is at least three years ago.

2. The tax return was filed at least two years ago.

3. The tax assessment is at least 240 days old.

4. The tax return was not fraudulent.

5. The taxpayer is not guilty of tax evasion.

Nondischargeable Tax Debts

The following type of non-income-related tax debts cannot be discharged in a Chapter 7 bankruptcy:

Tax liens. A Chapter 7 bankruptcy discharge of income taxes wipes out the personal obligation to pay the tax and prevents the taxing authority from going after your bank account or wages. However, tax liens, also known as secured taxes, will remain attached to your property. This rule applies only to tax liens recorded against your property before you file for bankruptcy. This means that although you might not be personally liable for the tax debt, you’ll have to pay the lien from any profits when you sell the property.

Recent property taxes. If a property tax is incurred before you file for bankruptcy, the tax is non-dischargeable. However, this only applies to property taxes last payable within one year of your bankruptcy filing. You can discharge your personal liability for property taxes that were payable more than one year before your bankruptcy filing. Keep in mind, though, that many counties attach a lien to your property upon assessment or one year afterwards. If you have a lien against your property for the property tax, that lien will remain after your Chapter 7 discharge.

Taxes that a third party is required to collect or withhold. This covers the so-called “trust fund” taxes such as FICA, Medicare, and income taxes than an employer must withhold from the pay of employees, and sales taxes paid by the debtor’s customers that the debtor is required to send to a governmental unit.

Certain employment taxes, excise taxes, and custom duties, depending on specific time periods.

Non-punitive tax penalties on nondischargeable taxes if the transaction or event that sparked the penalty occurred less than three years before filing the bankruptcy petition.

Erroneous tax refunds or credits relating to nondischargeable taxes.