While bankruptcy can be a great financial tool to help you get out from under debt and get a fresh start, it doesn’t relieve every type of debt. Certain types of debt, like student loans, delinquent taxes, and past due child support are not usually discharged with bankruptcy. There are a few exceptions to the rules, though, and you may be able to discharge your tax debt if you go about it the right way.
Why Can’t Taxes Be Discharged?
The IRS is in one of the top priority positions when it comes to collecting on debt, and it’s difficult, and with some tax debts impossible, to get out of paying them off. The rules of bankruptcy, especially as it pertains to Chapter 7, state that only certain debts are discharged free and clear by bankruptcy.
Tax debt is usually a priority debt, or sometimes a secured debt if the taxing authority has filed an appropriate tax lien. When the debt to the taxing authority is secured (by virtue of a tax lien) or a priority debt, then the debt will not be discharged in bankruptcy.
An Exception to the Rule
There are some cases where taxes can be discharged in a bankruptcy, but there are very specific qualifications that must be met:
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Filing Requirement: There are deadlines that have to be met in order for taxes to be discharged, and they all start from when you file your return. If you haven’t filed, you won’t qualify for any permanent relief through bankruptcy, though there can be meaning full temporary relief in a Chapter 13.
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Income Taxes Only: Only income taxes are eligible for possible discharge in a bankruptcy. Other types of taxes may be paid off in a Chapter 13 bankruptcy, but not eliminated without payment.
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3-Year Rule: The due date for your taxes must be at least 3 years past in order for the debt to qualify for possible elimination or discharge in bankruptcy. This includes any extensions you filed for. There are other events that can extend this time period.
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Fraud-Free Filing: If you committed fraud (such as identity theft), tax evasion, or any other unlawful practice when filing, the debt can’t be discharged.
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2 Year Rule: The tax return must be on file with the taxing authority for at least two years in order to be eligible for discharge.
Timing is Everything
It’s clear to see that the rules regarding taxes and bankruptcy are all about timing. When you filed for your return and when you file for your bankruptcy make all the difference in whether you will be able to discharge your tax debt through bankruptcy. Taxes that are owed for the current year will not be able to be eligible. There are many other minor exceptions to taxes being eliminated in bankruptcy.
An experienced bankruptcy attorney is needed to help you determine if you qualify. Mistakes in these areas will only cause more fees and may ruin your chances of getting your taxes included. If it turns out that you can’t get your taxes discharged, quite often a Chapter 13 can be a great option to pay the taxes in a very affordable fashion. It is critical if you owe taxes that you only meet with an experienced bankruptcy attorney who had filed many cases involving taxes. If the attorney does not address taxes and how they can be properly dealt with in bankruptcy when you meet with the attorney, you should seek additional advice with a different attorney.