Bankruptcy filers can sometimes discharge (wipe out) debts for income taxes in bankruptcy. Several conditions must be met.
The information below gives a starting point for determining if your taxes can be discharged. There are several additional criteria that must be met.
To get started, you will need to order copies of your federal tax transcripts. Order a transcript for each tax year you are trying to discharge.
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Tax return DUE at least three years ago.
To be dischargeable, the tax return must have been originally due at least three years before your bankruptcy filing date.
Tax return FILED at least two years ago.
At least two years prior to your bankruptcy filing date, you must have filed a tax return for the debt you are trying to discharge.
Taxes were assessed at least 240 days ago.
The taxing authority must have assessed the tax 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 previously filed for bankruptcy.
Note: many times late-filed tax returns take a very long time to be processed by the IRS. Just because you filed a return several years ago, do not assume it is impossible that you have a “new” assessment that has hit your tax account in the past 240 days. This is why you need to order tax transcripts.
Tax not assessed via substitute for return process.
If you don’t file your taxes, the IRS will eventually file what is called a substitute return on your behalf. The substitute return assesses the amount of tax you owe.
IRS Office of Chief Counsel Notice CC-2010-016 states that the IRS will object to discharge of tax when the IRS was forced to prepare a substitute return.
Only certain kinds of taxes and penalties can be discharged.
Payroll taxes or penalties for fraud cannot be discharged in bankruptcy.
If you filed a fraudulent tax return, bankruptcy can’t discharge your tax liability.
Federal Tax Liens Treated Differently in Bankruptcy.
A bankruptcy may be able to wipe out your personal liability for the tax debt. But, if the IRS has recorded a tax lien on your property, the lien can remain even after the bankruptcy.
A federal tax lien protects the government’s interest in all your property, including real estate, personal property and financial assets. A federal tax lien exists after the IRS (1) assesses your tax liability and (2) Sends you a bill that explains how much you owe (Notice and Demand for Payment) and you don’t pay the tax debt.
The IRS files a public document, the Notice of Federal Tax Lien, to alert creditors that the government has a legal right to your property. The notice is filed in the county where you live or where the property is located. Once the IRS files its notice, it has a lien against all property — real or personal — that you own. The lien attaches to all property that you own from and after the date that the IRS files its lien. Federal tax liens continue in effect for up to 10 years after the IRS assesses the taxes that you owe.
Most Federal Tax Liens remain intact after a Chapter 7 bankruptcy.