Tax Debt and Bankruptcy: an Overview

When filing for bankruptcy a lot of debtors have questions about whether their tax debt is dischargeable.  Some bankruptcy filers think that there is no possibility of discharging their tax debt in bankruptcy.  While discharging tax debt is not as easy as discharging unsecure non-priority debt like credit card debt, discharging tax debt is possible under the right circumstances.

Five criteria must be met in order for the bankruptcy court to discharge a debtor’s tax debt.  The first of which is that the tax debt must be the result of income taxes.  The taxes must also have been originally due three or more years prior to filing. Further, the tax returns must have been filed two or more years prior to the filing of a Chapter 7 bankruptcy petition.  Also, the taxes must not have been assessed within 240 days of filing the bankruptcy.  Assessing means that the taxing authority entered the tax debt as a liability in their records. The final criterion is the most ambiguous criterion.  In order to discharge income tax debt, the debtor must not have committed fraud or willfully evaded the taxes that you owe.  This can get a little tricky if the debtor claimed the wrong amount of income or exemptions on the debtor’s income tax return and often requires an experienced bankruptcy attorney to properly evaluate the case.

While it is less likely that income tax debt will be discharged in a Chapter 7 bankruptcy than other unsecured debt, it is not impossible.  Assessing whether a debtor’s tax debt is dischargeable requires careful attention to the timelines for dischargeability as well as an investigation into the reasons why the debtor owes the taxes.  If someone is considering filing for bankruptcy and has tax debt it might be in their best interest to consult an attorney for a full assessment of the dischargeability of that debt.