Wipe Out Income Tax Debt with Bankruptcy
While the majority of taxes cannot be eliminated through bankruptcy, some can. Though not simple, filing for Chapter 7 bankruptcy and finding out if your debts qualify for discharge may eliminate some tax debt.
You can wipe out or discharge tax debt by filing Chapter 7 bankruptcy only if all of the following conditions are met:
- The debt is federal or state income tax debt. Other taxes, such as fraud penalties or payroll taxes, cannot be eliminated through bankruptcy.
- You did not willfully evade paying your taxes or file a fraudulent return. Bankruptcy will not help in these circumstances.
- Your tax debt is at least three years old. The original tax return must have been due at least three years prior in order to effectively file for bankruptcy.
- You filed a tax return at least two years before filing for bankruptcy. To eliminate a tax debt, a return for that debt must have been filed. Generally, if your extensions expired and you filed late, you have not filed a true return and will not be able to eliminate the tax debt.
- The tax debt must have been assessed by the IRS 240 or more days before you file for bankruptcy, or must not have been assessed yet. This is called the “240 day rule.” If the IRS suspended collection efforts due to a compromise or previous filing, this deadline may be extended.
Tax Liens & Bankruptcy
Should you qualify for Chapter 7 bankruptcy, and meet all of the above criteria, unfortunately bankruptcy will not eliminate prior tax liens.
Your obligation to pay off the debt will be discharged, but not eliminated. However, the IRS will no longer be able to go after your income or bank account.
However if a tax lien was filed before you filed for bankruptcy, the lien will remain on the property. If you ever want to sell your property, you will have to pay off the lien before you can do so.
Do you have other tax related, or bankruptcy questions? Let us know. We’re happy to help.