Can Tax Debt be Discharged in Bankruptcy? May 27, 2014
Bankruptcy laws are designed to help people that are overwhelmed with debt and unable to pay off creditors. The ultimate goal is to provide the debtor with a fresh start. Many debts are dischargeable, but what happens when the creditor in question is the IRS?
Generally, the Internal Revenue Service is not treated as a typical creditor. As a result, taxes are often not dischargeable in bankruptcy. Some exceptions apply, and one example of potentially dischargeable debt is federal income tax debt. Whether it is dischargeable depends on how old it is, if the debtor filed the return and whether relief was granted under Chapter 7 or 13.
Essentially, a chapter 7 bankruptcy petition provides for a full discharge of allowable debts while a chapter 13 establishes a repayment plan. Under a Chapter 7 petition for relief, income taxes may be discharged. In order to apply, all the following criteria must be satisfied:
- The debtor filed a legitimate tax return two years prior to filing for bankruptcy
- The due date for filing the tax return must be at least three years old
- The tax assessment is at least 240 days old
- The debtor did not commit fraud
- The debtor is not guilty of willful tax evasion
Under Chapter 13, debts fall into a repayment plan. However, according to the IRS if a debtor does not complete the repayment plan they may, in some cases, apply for discharge of income tax debt if they fulfill all the criteria listed above.
Other Options to Eliminate Tax Debt
If the tax debt in question does not qualify for relief through bankruptcy, other options may be available. Debtors can enter an agreement with the IRS to make installment payments, slowly paying off the tax debt in more manageable payments over a longer period of time. The debtor could also attempt to reach an agreement with the IRS by offering a compromise that will allow them to pay off a certain portion of the debt and have the IRS forgive the remaining balance.
Navigating through the rules on discharging tax debt is difficult. If you or a loved one is filing for bankruptcy, it is important to seek the counsel of an experienced bankruptcy lawyer to ensure all your legal rights are protected.