Discharging Tax Debt in Bankruptcy
Individual Income Tax debts may be able to be discharged in a chapter 7 bankruptcy or satisfied through a chapter 13 bankruptcy. However, any taxpayer considering filing for bankruptcy should discuss the option with a bankruptcy attorney, and be aware of the overall effect of the bankruptcy, and limitations on filing a bankruptcy in the future.
Bankruptcy laws specifically state and allow for the discharge of certain tax debts.The elements and issues considered regarding whether or not a tax debt can be discharged through bankruptcy are: When the tax return was filed; when the tax was assessed; was the tax return fraudulent, or was the taxpayer evading taxes?
Prior to filing bankruptcy the taxpayer must have filed all current tax returns, usually the four years prior to the filing of the bankruptcy. Specific types of taxes, such as the personal assessment of the trust fund recovery penalty from 941 tax debts cannot be discharged in bankruptcy. Once the bankruptcy is discharged, the remaining tax liabilities go back to the IRS collection department for active collection on the debt.
Often if a taxpayer does not have significant other debts (non-tax debts), or depending upon the types of tax debts or when the tax debt accrued, it may be best to consider attempting to resolve the tax debt through an offer in compromise, partial payment installment agreement or other resolution. However, if the taxpayer has other debts, which are dischargeable through the bankruptcy, it may very well be an option to consider.
We recommend that any individual or business considering bankruptcy seek professional consultation directly from a bankruptcy specialist.
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