Can Tax Debt Be Discharged via Bankruptcy?

Nobody likes paying taxes. And our current system of tax laws is so byzantine that many of us have to hire a tax professional or use tax software just for simple returns. If you’ve fallen behind in paying taxes, you’re certainly not the first, and you won’t be the last.

You might see TV commercials with people claiming that you wipe out all of your tax debt by filing for bankruptcy. In most circumstances, this is not true. For example, if you choose to file Chapter 13 bankruptcy, then your tax debt will most likely be part of your repayment plan, so you’ll end up paying taxes over time. If you file for Chapter 7, your tax debt will most likely still remain after filing, unless your tax debt is dischargeable, otherwise known as “non-priority” tax debt.

What Tax Debt Is Dischargeable via Chapter 7?

The only tax debt that is dischargeable, and is considered “non-priority,” is tax debt from income taxes. That’s it. But this includes both California income tax debt and IRS income tax debt. If you have any penalties from tax fraud or tax debt on payroll taxes, those cannot be eliminated via bankruptcy. Income tax debt can only be discharged if:

• You filed a tax return for the tax debt you’re seeking to avoid, AND the tax return must have been filed at least 2 years prior to your Chapter 7 filing.
• This income tax debt must be assessed by the IRS at least 240 days prior to your Chapter 7 filing, or must not have been assessed yet.
• The tax debt must be at least 3 years old – meaning that the tax debt must have initially been due at least 3 years prior to your bankruptcy filing.
• You did not commit tax evasion or tax fraud. If you used a fake or incorrect Social Security number on your return, your return was fraudulent, or you evaded paying your income taxes, then you will not qualify.

Meeting all four of these hurdles is not easy for most people with tax debt, which is why most of the time, discharging tax debt by filing for Chapter 7 bankruptcy simply won’t work. However, if you think that you meet all of these hurdles, then Chapter 7 might be a viable option for you.

Bankruptcy filing in Northern California can help give you a fresh start, but you need an experienced guide to make sure you get the protection that’s right for you. Contact the licensed attorneys at Wells, Call, Clark, Bennett & Clawson to schedule a consultation.

What About Federal Tax Liens?

If the IRS or state has ever recorded a lien on your property, you’ll have to pay it. Sorry, this is not dischargeable, ever.

What Alternatives Are There?

The state of California and the IRS do offer installment plans that would not require you to file bankruptcy, which might be an option for you. You will probably be able to get some of the penalties and interest removed, and the tax amount reduced by agreeing to a payment plan. Collection suspensions are also possible to apply for, but you must demonstrate evidence of an ongoing financial hardship in order to qualify.

If you think filing for Chapter 7 or 13 bankruptcy protection might be the right step for you, please contact us online or fill out the Contact Us form below. You’ll be able to speak with an actual Northern California attorney regarding your unique situation.