Does Bankruptcy Discharge My Income Tax Debt?

Ask a Washington DC Bankruptcy Lawyer about Back Taxes

Can you discharge your income taxes in a bankruptcy? The short answer is, maybe. Taxes owed to the federal or state government are normally not dischargeable in bankruptcy. However, there are situations when your income taxes may be eligible for bankruptcy discharge.

If you have a significant amount of income tax debt, it is easy to feel overwhelmed. You might not think you have any way to get out from under years of unpaid back taxes. If this sounds like you, our Maryland and Washington DC bankruptcy lawyer can help. We can review your finances and help determine if you meet the necessary requirements to have your tax debts erased in a bankruptcy discharge.

When Do Income Taxes Qualify for Discharge in Bankruptcy?

Under most circumstances, taxes owed to state or federal governments are non-dischargeable. However, if your debts fulfill the following criteria, you may be able to eliminate them completely though bankruptcy:

  1. The taxes must be income taxes only. Payroll taxes, fraud penalties, business taxes, sales taxes and other types of taxes cannot be discharged through bankruptcy.
  2. You filed a tax return for the taxes you wish to discharge. If you do not file a return, the IRS will file a substitute form on your behalf. However, this substitute return is not enough to meet the requirements for a bankruptcy discharge of your income tax debts. You must still file a return, even if it is late, for all the back taxes you wish to eliminate.
  3. You have not engaged in fraud or willful tax evasion.
  4. The Three-Year Rule: The tax debt you owe is at least three years old when you file for bankruptcy. For example, a person owes $5,000 in taxes on April 15, 2016. If that person files for bankruptcy after April 15, 2019, then that person meets the three-year rule.
  5. The Two-Year Rule: You must have filed a tax return for all dischargeable taxes yourself at least two years before filing for bankruptcy.
  6. The 240-Day Rule: The IRS must assess your taxes at least 240 days before you file for bankruptcy or not have assessed the taxes at all.

If your tax debts do not meet all of these requirements, then they are likely non-dischargeable through bankruptcy. This means that, in most cases, when you file Chapter 7 bankruptcy, you will continue to owe your tax debts when the bankruptcy process concludes. If you file Chapter 13 bankruptcy, you must usually repay your back taxes in full through a repayment plan.

Are Tax Liens Dischargeable in Bankruptcy?

Even if you meet all the requirements for income tax discharge, there are still some debts that cannot be wiped out. If the Internal Revenue Service (IRS) has placed a lien on your property due to nonpayment of taxes, then you will still owe the IRS the value of that lien after your bankruptcy discharge.

However, it is possible to have a tax lien removed after bankruptcy. Your options to do so include:

  1. Voluntary Release of a Post-Discharge Tax Lien – If taxes meet discharge requirements, the IRS will often release liens if you own little property of value to satisfy the lien. However, this is not automatic; you usually have to request this from the IRS yourself.
  2. Tax Lien Settlement – If you have significant property, the IRS will not often release a lien. However, you and your bankruptcy attorney may be able to negotiate a settlement for much less than the lien’s value.
  3. Chapter 13 Bankruptcy – If you have elected to use Chapter 13 bankruptcy for your income tax discharge, you can use a payment plan to pay off the lien. Afterwards, the lien will be removed.
  4. Tax Lien Expiration – Most IRS liens expire and will be automatically removed after 10 years.

If the IRS issues a lien on your property, you face additional hurdles in getting a tax debt discharge. The best way to bring quick resolution to your tax struggles is to discuss your case with an attorney.

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