Are state tax debts dischargeable in bankruptcy? In one case, an appellate court ruled that they are not. As always, consult a qualified Maryland bankruptcy lawyer for answers to your specific questions.
Last month, the Fourth Circuit Court of Appeals ruled that a woman’s bankruptcy filing did not wipe out her Maryland state tax debt. In 1996, she filed her Maryland state income tax returns for 1992 to 1996. She then filed Chapter 7 bankruptcy in April 2007 and received a discharge of debts.
The Internal Revenue Service (IRS) determined in 1998 that her federal adjusted gross income was actually more than she reported on her 1992 to 1996 Maryland tax returns. The IRS notified the Maryland Comptroller of this fact and the comptroller assessed $500,000 in taxes, penalties and interest against her. The woman re-opened her bankruptcy complaint in 2009 seeking a determination that her 2007 bankruptcy wiped out her Maryland income tax debt from 1992 to 1996.
The State of Maryland disputed, claiming her state tax debt survived the bankruptcy because the bankruptcy code prohibits discharge of a tax debt with respect to which a return, or report, was not filed. The court agreed with the state because the woman did not file a report of the federal tax adjustments as required by state law. As a result, her state tax debt survived the bankruptcy.
The court said that even though the IRS reported the woman’s adjusted gross income, she still did not do it herself as required.
Contact a qualified Maryland bankruptcy attorney if you have questions about tax debts and bankruptcy.