Many Taxpayers have the mistaken belief that taxes cannot be discharged through bankruptcy. Fortunately, this is not true! In fact, bankruptcy can be one of the easiest and most effective methods of eliminating overwhelming tax debt. For the individual Taxpayer, Chapter 7 & 13 of the Bankruptcy Code provide the opportunity to discharge tax liabilities.
Income taxes are generally dischargeable if the Taxpayer meets all of the following conditions:
- A nonfraudulent tax return was filed for the year(s) in question. If the Internal Revenue Service filed a Substitute For Return which the Taxpayer neither signed nor consented to the return is not considered filed.
- The tax liability in question is for a tax return filed at least two years before the bankruptcy filing date.
- The tax return for the tax liability in question was due at least three years before the bankruptcy filing date.
- The Internal Revenue Service has not assessed the liability in question within 240 days of the bankruptcy filing date. The aforementioned 240 day period is extended by the period of time collection activity was suspended by matters including an Offer In Comprise or another bankruptcy case.
If all of the above requirements are met, the Taxpayer’s personal liability for the relevant taxes should be discharged. However, a lien placed on the Taxpayer’s property by the Internal Revenue Service or other taxing authority will remain after the bankruptcy case is closed.
Property taxes aren’t dischargeable unless they became due more than a year before the bankruptcy filing date. As discussed above, any tax lien will remain on the property. Accordingly, bankruptcy is typically not a viable solution for property tax issues.
Taxes that generally are not dischargeable in bankruptcy include employment taxes, trust fund penalty, sales taxes, excise taxes and customs duties.
Finally, it is important to note, that the initiation of a bankruptcy case will generally stop all collection activity by the Internal Revenue Service. Levies against wages must be released by the Internal Revenue Service upon receipt of a Notice of Bankruptcy Filing. Taxpayers requiring the immediate release of a levy against their paycheck should seriously consider an emergency bankruptcy filing.