You can discharge old income tax debt in Chapter 7 bankruptcy, but most other types of taxes are not dischargeable. Here are the details.
It is a common misconception that you cannot get rid of tax debts in Chapter 7 bankruptcy. This is not true. You can discharge (wipe out) income tax debts if they meet the qualifications, limitations, and restrictions laid out below.
(To learn more about what happens to your debts in Chapter 7 bankruptcy, including which debts are discharged and which are not, see our Chapter 7 Bankruptcy area.)
The Requirements for Discharging Income Tax Debt
You will be able to get rid of your tax debts in Chapter 7 bankruptcy if you meet the following requirements:
- The taxes are income-based. Income taxes are the only kind of debt that Chapter 7 is able to discharge. The tax debt must be for federal or state income taxes or taxes on gross receipts.
- The return was due at least three years ago. The taxes must be from a tax return that was due (including all valid extensions) at least three years before you filed for bankruptcy. For example, if taxes were disclosed in a 2005 income tax return for which extensions to file the return expired on October 15, 2006, the tax return due date test will be satisfied if the bankruptcy petition is filed after October 15, 2009.
- You filed the return at least two years ago. You must have filed the tax return at least two years before filing for bankruptcy. In most courts, a late return does not count as a "return" and you won't be able to discharge the taxes (late means your extensions have expired and the IRS filed a substitute return on your behalf). In other courts, you can discharge tax debt even if you file a late return, assuming you meet the other criteria.
- The taxes were assessed at least 240 days ago. The taxing authority must have assessed the tax (entered the liability on the taxing authority's records) 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 had previously filed for bankruptcy.
- No fraud or willful evasion. The tax return must not be fraudulent or frivolous and the you cannot be guilty of any intentional act of evading the tax laws. If you file a joint return, the taxing authority must prove that both you and your spouse committed an act of fraud related to the applicable return or willfully attempted to evade the tax in order for the court to deny the discharge of the tax debt.
Nondischargeable Tax Debts
You cannot get rid of most non-income-related tax debts. The following debts won't be discharged in Chapter 7 bankruptcy:
- Tax liens. A Chapter 7 bankruptcy discharge of income taxes wipes out the personal obligation to pay the tax and prevents the taxing authority from going after your bank account or wages. However, tax liens, also known as secured taxes, will remain attached to your property. This rule applies only to tax liens recorded against your property before you file for bankruptcy. This means that although you might not be personally liable for the tax debt, you'll have to pay the lien from any profits when you sell the property.
- Recent property taxes. If a property tax is incurred before you file for bankruptcy, the tax is nondischargeable. However, this only applies to property taxes last payable within one year of your bankruptcy filing. You can discharge your personal liability for property taxes that were payable (without penalty) more than one year before your bankruptcy filing. Keep in mind, though, that many counties attach a lien to your property upon upon assessment or one year afterwards. If you have a lien against your property for the property tax, that lien will remain after your Chapter 7 discharge (although your personal liability will be removed). T
- Taxes that a third party is required to collect or withhold. This covers the so-called "trust fund" taxes such as FICA, Medicare, and income taxes than an employer must withhold from the pay of employees, and sales taxes paid by the debtor's customers that the debtor is required to send to a governmental unit.
- Certain employment taxes, excise taxes, and custom duties, depending on specific time periods.
- Non-punitive tax penalties on nondischargeable taxes if the transaction or event that sparked the penalty occurred less than three years before filing the bankruptcy petition.
- Erroneous tax refunds or credits relating to nondischargeable taxes.
To learn about your other options for dealing with tax debt, check out the section of our site.
FAQs
You will be able to get rid of your tax debts in Chapter 7 bankruptcy if you meet the following requirements: The taxes are income-based. Income taxes are the only kind of debt that Chapter 7 is able to discharge. The tax debt must be for federal or state income taxes or taxes on gross receipts.
Does Chapter 7 get rid of tax debt? ›
You can wipe out or discharge tax debt by filing Chapter 7 bankruptcy only if all of the following conditions are met: The debt is federal or state income tax debt. Other taxes, such as fraud penalties or payroll taxes, cannot be eliminated through bankruptcy.
What happens if I owe taxes during bankruptcy? ›
During your bankruptcy you must continue to file, or get an extension of time to file, all required returns. During your bankruptcy case you should pay all current taxes as they come due. Failure to file returns and/or pay current taxes during your bankruptcy may result in your case being dismissed.
Can I keep my tax return in Chapter 7? ›
Use a Bankruptcy Exemption to Protect Your Tax Refund in Chapter 7 Bankruptcy. You might be able to keep your tax refund by claiming it as exempt property that the trustee can't take.
Are tax penalties dischargeable in bankruptcy? ›
Depending on circ*mstances, interest and penalties may be discharged with a Chapter 13 filing. Interest on a dischargeable tax also will be erased. Penalties are dischargeable if they are more than three years old. In a Chapter 7 filing, the debtor sells off most assets and gives the proceeds to creditors.
Who qualifies for the IRS fresh start program? ›
General Initiative Eligibility
You should be current on all federal tax filings and owe no more than $50,000 in back taxes, interest and penalties combined. If you're a small business owner, you could be eligible for relief under the Fresh Start Initiative if you owe no more than $25,000 in payroll taxes.
What happens if you owe the IRS more than $25,000? ›
For individuals who establish a payment plan (installment agreement) online, balances over $25,000 must be paid by Direct Debit. See Long-term Payment Plan below for other payment options.
Does the IRS have a hardship program? ›
Answer: The IRS Hardship Program, also known as the Currently Not Collectible (CNC) status, is a program that provides temporary relief to taxpayers who are experiencing financial hardship and cannot afford to pay their tax debt.
How do I get my IRS debt forgiven? ›
Can I get my tax debt forgiven? 5 options to consider
- Use a professional tax relief service.
- Utilize the offer in compromise program.
- Request a currently not collectible (CNC) status.
- File for bankruptcy.
- Agree on a payment plan.
The IRS does have the authority to write off all or some of your tax debt and settle with you for less than you owe. This is called an offer in compromise, or OIC.
Chapter 7 bankruptcy is a type of bankruptcy filing commonly referred to as liquidation because it involves selling the debtor's assets in bankruptcy. Assets, like real estate, vehicles, and business-related property, are included in a Chapter 7 filing.
Does the trustee monitor your bank account? ›
They have a right to perform a full audit of your accounts or check them any time it is necessary. However, it is rare for them to keep close tabs on every account.
Will I lose my savings if I file Chapter 7? ›
The short answer is that the purpose of Chapter 7 is to give you a fresh start, not leave you destitute. If an item of property, an investment, or cash is "exempt" or protected under the bankruptcy exemption laws, you can keep it. Get debt relief now.
Are taxes a priority claim in bankruptcy? ›
Priority is given to income taxes and other taxes of a kind described in section 507(a)(6)(A)(i) and (ii) which the Federal, State, or local tax authority had assessed within 3 years after the last due date of the return, that is, including any extension of time to file the return, if the debtor filed in title 11 ...
What tax debts are dischargeable? ›
There are some limited circ*mstances in which you can discharge federal, state and local income taxes, as well as penalties and interest, in Chapter 7, Chapter 11, or Chapter 13 bankruptcy. Income taxes are the only kind of tax debt you can discharge under Chapter 7.
What if I owe taxes while in Chapter 13? ›
You still have to pay taxes while in chapter 13 bankruptcy. Tax debt owed before your case is filed will be included in your chapter 13 and must be paid in full over the course of the 3-5 years repayment plan. Tax returns that you receive during this 3-5 year period must be provided to your trustee.
What happens if I owe the IRS and can't pay? ›
If you find that you cannot possibly come up with the money to pay your taxes, even through an installment plan, you may apply for an “offer in compromise” to settle your tax debt for less than the full amount owed.
What debts can be forgiven under Chapter 7? ›
A Chapter 7 bankruptcy will generally discharge unsecured debts, including credit card debt, unsecured personal loans, medical bills and payday loans. The court discharges all of these remaining eligible debts at the end of the bankruptcy process, generally about four to six months after you start.
