Does Filing for Bankruptcy Clear Tax Debt?

Many people use bankruptcy as a way to get rid of debt. While bankruptcy can help eliminate a variety of debts, it does not work for everything. Many people struggle with tax debt and wonder if filing for bankruptcy would be a good way to get rid of it.

The IRS does offer a couple of options for those who have tax debt. Payment plans and an Offer in Compromise are available. If you want to wipe out past-due federal taxes that you cannot pay, bankruptcy may be an option.

However, before you file for bankruptcy, you must meet the following criteria:

• You must file all required tax returns for tax periods within four years of your bankruptcy filing.
• During your bankruptcy, you must continue to file all required returns.
• During your bankruptcy case, you must pay all current taxes when due.
• Failure to file returns and/or pay current taxes may result in your bankruptcy case being dismissed.

Filing for bankruptcy affects taxes in different ways, depending on the type of bankruptcy. Here is what you need to know.

Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, tax debt may be discharged if these conditions are met:

• The tax debt is income tax. Payroll taxes, fraud penalties, and other non-income tax debts cannot be discharged.
• The debt is at least three years old. The tax return must have been due (including extensions) at least three years before filing.
• You filed the tax return at least two years ago. The tax return must have been filed at least two years prior to the bankruptcy filing.
• The IRS assessed the tax debt at least 240 days ago. This is known as the 240-day rule.
• You did not commit fraud or tax evasion. Tax fraud or evasion renders the debt non-dischargeable.

Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, tax debt is treated differently:

• You enter a repayment plan lasting 3 to 5 years.
• Priority tax debts must be paid in full through the plan.
• Non-priority tax debts may be discharged after completing the plan as long as the same rules are followed.

Taxes That Cannot Be Discharged

• Trust fund taxes. Trust fund taxes are income taxes, Social Security taxes and Medicare taxes you withhold from the wages of an employee as their employer. You must then pay these taxes to the IRS.
• Tax liens, which are secured against property, will remain on the property, even if the personal liability is discharged.
• Recent tax debts, such as those incurred within the past three years.

Contact Us Today

Bankruptcy is complex. Navigating tax discharge rules often requires the assistance of a bankruptcy attorney. They can help assess your specific situation and determine the best course of action.

Florida bankruptcy attorney Brian K. McMahon, P.A. can answer your questions about tax debt.

Call (561) 658-1789 or fill out the online form to schedule a consultation. We serve the West Palm Beach, Boca Raton, Port St. Lucie, and South Florida areas.