When You Can Erase Taxes in Bankruptcy

by
Richard Fonfrias, J.D.
Chicago’s Financial Rescue & Bankruptcy Lawyer
Fonfrias Law Group, LLC

Discharging taxes owed to the government isn’t nearly as easy as you might think. True, you’ve heard commercials on radio and TV that make erasing taxes sound easy. But don’t be misled. You cannot discharge most taxes in bankruptcy.

In fact, if you owe any taxes now, you will still owe them at the end of a Chapter 7 bankruptcy. Or, in the case of a Chapter 13 bankruptcy, you’ll have to pay the full amount of those taxes in your repayment plan.

If you want to discharge taxes in bankruptcy, Chapter 7 (liquidation) will likely be what your lawyer recommends. However, to know whether you can erase taxes, you must meet all of the following criteria:

#1. The taxes you owe must be income taxes. You cannot erase any other type of taxes or penalties in bankruptcy.

#2. You did not commit tax evasion or fraud. If you tried to intentionally evade your tax liability or if you filed a fraudulent tax return, you cannot erase your taxes in bankruptcy.

#3. Your tax bill must be at least three years old. To erase income taxes in bankruptcy, your income tax return must have been due a minimum of three years before you filed for bankruptcy.

#4.You must have filed an income tax return for the tax debt you want to erase at least two years before you filed for bankruptcy.

#5. You must meet one of these two time requirements. The IRS must have assessed your income tax debt at least 240 days before you filed for bankruptcy. Or, the IRS must have not yet assessed your taxes. (The time requirement may be longer if the IRS delayed its collection efforts because of an offer in compromise or an earlier bankruptcy filing.)

If you meet these five criteria, then your taxes qualify for discharge under a Chapter 7 bankruptcy. But wait, the IRS isn’t giving up that easily. You cannot eliminate these taxes in bankruptcy if your tax debt has been secured with a recorded tax lien.

Yes, after you file a Chapter 7 bankruptcy, you will have no personal obligation to pay these taxes. In addition, your Chapter 7 bankruptcy will keep the IRS from seizing your wages and your bank accounts. However, if the IRS recorded a federal tax lien on your property before your bankruptcy filing, then the lien will stay on your property. As a result, if you ever want to sell your property, you must first pay off the federal tax debt secured by the lien.