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The Requirements for Discharging Income Tax Debt
You will be able to get rid of your tax debts in Chapter 7 bankruptcy if you meet the following requirements:
- The taxes are income-based. Income taxes are the only kind of debt that Chapter 7 is able to discharge. The tax debt must be for federal or state income taxes or taxes on gross receipts.
- The return was due at least three years ago. The taxes must be from a tax return that was due (including all valid extensions) at least three years before you filed for bankruptcy. For example, if taxes were disclosed in a 2005 income tax return for which extensions to file the return expired on October 15, 2006, the tax return due date test will be satisfied if the bankruptcy petition is filed after October 15, 2009.
- You filed the return at least two years ago. You must have filed the tax return at least two years before filing for bankruptcy (having the IRS file a substitute for return will not satisfy this requirement). To avoid additional objections from the taxing authority, you must make sure the return is properly signed, mailed, and sufficiently complete to be deemed a tax return. In continuing with the example above, if extensions to file the 2005 return expired on October 15, 2006, you filed the return on April 15, 2008, and you filed for bankruptcy on October 15, 2009, you won't be able to discharge the debts. You will have satisfied the tax return due date test, but not the tax return filing date text. In this scenario, you must wait until two years after April 15, 2008, or until April 15, 2010, to file for bankruptcy.
- The taxes were assessed at least 240 days ago. The taxing authority must have assessed the tax (entered the liability on the taxing authority’s records) against you at least 240 days before you filed for bankruptcy. This time limit may be extended if there was an offer in compromise between the taxing authority and you or if you had previously filed for bankruptcy.
- No fraud or willful evasion. The tax return must not be fraudulent or frivolous and the you cannot be guilty of any intentional act of evading the tax laws. If you file a joint return, the taxing authority must prove that both you and your spouse committed an act of fraud related to the applicable return or willfully attempted to evade the tax in order for the court to deny the discharge of the tax debt.
Nondischargeable Tax Debts
You cannot get rid of most non-income-related tax debts. The following debts won't be discharged in Chapter 7 bankruptcy:
- Tax liens. A Chapter 7 bankruptcy discharge of income taxes wipes out the personal obligation to pay the tax and prevents the taxing authority from going after your bank account or wages. However, tax liens, also known as secured taxes, will remain attached to your property. This rule applies only to tax liens recorded against your property before you file for bankruptcy. This means that although you might not be personally liable for the tax debt, you'll have to pay the lien from any profits when you sell the property.
- Recent property taxes. If a property tax is incurred before you file for bankruptcy, the tax is nondischargeable. However, this only applies to property taxes last payable within one year of your bankruptcy filing. You can discharge your personal liability for property taxes that were payable (without penalty) more than one year before your bankruptcy filing. Keep in mind, though, that many counties attach a lien to your property upon upon assessment or one year afterwards. If you have a lien against your property for the property tax, that lien will remain after your Chapter 7 discharge (although your personal liability will be removed). T
- Taxes that a third party is required to collect or withhold. This covers the so-called “trust fund” taxes such as FICA, Medicare, and income taxes than an employer must withhold from the pay of employees, and sales taxes paid by the debtor’s customers that the debtor is required to send to a governmental unit.
- Certain employment taxes, excise taxes, and custom duties, depending on specific time periods.
- Non-punitive tax penalties on nondischargeable taxes if the transaction or event that sparked the penalty occurred less than three years before filing the bankruptcy petition.
- Erroneous tax refunds or credits relating to nondischargeable taxes.
