In most cases, debtors will still be responsible for their tax debts even after filing for bankruptcy. But in certain circumstances, however, bankruptcy law enables the discharge of specific tax debts. With chapter 7 bankruptcies, debtors can discharge certain debts, including medical bills, credit card debt, and federal tax debt. While with a chapter 13 bankruptcy, you’ll enter into a repayment plan for your debts.
How does a debtor qualify for a discharge?
Whether or not your tax debt could be discharged would depend on the kind of bankruptcy you want to file for, the kind of tax, if you filed for a tax return, and how old your tax debt is. Due to this, it’s best that you discuss your case with an experienced bankruptcy attorney in Salt Lake City before you even do anything. Generally speaking. However, your federal income taxes can be discharged in a chapter 7 bankruptcy if you can meet the conditions below:
- You want to discharge income taxes. Penalties and payroll taxes for fraud aren’t dischargeable.
- Your tax liability is due to a tax return originally due three years prior to you filing for bankruptcy.
- You filed a legitimate and timely tax return prior to filing for bankruptcy.
- You didn’t commit tax fraud, and your tax return did not contain any false information.
- You didn’t commit tax evasion intentionally.
Possible actions that might be considered as evasive include not putting your real name, changing your name’s spelling, putting a false Social Security number, not paying your taxes repeatedly, withdrawing money from your bank and then hiding it, and filing an incomplete or black tax return.
You are eligible for discharge according to the “240-day rule.” This means that your tax debt was evaluated by the IRS 240 days prior to your bankruptcy filing and in the event that the IRS stopped the collection during negotiations, it might likewise extend the applicable date.
Dischargeable penalties for taxes can likewise be discharged. Once your tax debt has been discharged, you’ll no longer be liable for paying your taxes. The IRS won’t also garnish your bank accounts or wages.
What happens to federal tax liens during bankruptcy?
Even if your tax debt has been discharged under chapter 7, in the event that there’s a federal tax lien on your property before you filed for bankruptcy, the tax lien will still remain. This means that you would need to pay off the tax lien if you want to sell your property.
Which tax debts can’t be discharged?
These kinds of tax debts can’t be discharged in a chapter 7 bankruptcy:
- Trust fund taxes
- Tax debts due to unfiled returns
- Withholding taxes that your employer withheld from your paycheck
- Tax debt penalties that the IRS deems not dischargeable
Fortunately, if your tax debt isn’t dischargeable under chapter 7 bankruptcy, you can negotiate with the IRS. You can either offer a compromise that will lead to settling your tax debt but at an amount lower than what you originally owe or enter into an installment plan. Talk to a local bankruptcy attorney to determine the best option for your specific case.