Millions of Americans struggle with tax debt each year and are often at a loss regarding what to do. Many eventually make the decision to file for bankruptcy and are convinced that all of their tax debt will be wiped away by the process. Unfortunately, however, this is not always the case. While debtors may be able to wipe away some of their tax burdens through bankruptcy protection, they may not be able to get the clean break they think.
The ability to discharge tax debt through bankruptcy is contingent upon a variety of circumstances, including:
Type of Tax
Only income taxes are eligible for discharge. Payroll taxes and penalties for fraud are not eligible and must be worked out via other means.
The debtor must have filed a return for the appropriate tax years at least two years prior to filing for bankruptcy. If this is not the case, they will have to wait.
Age of Tax Debt
The tax liability has to be at least three years old, meaning that it has to be from a return that was originally due three years before filing for bankruptcy.
Legality of Tax Debt
Those who have committed willful tax evasion, including changing their social security number, the spelling of their names and repeatedly failing to file taxes, are not eligible to discharge their debt through bankruptcy.
Federal Tax Liens
Even if the discharge of tax debt occurs under Chapter 7, if the IRS placed a federal tax lien on the debtor’s property prior to the bankruptcy case, it will remain after discharge.
Before making the decision to use the bankruptcy code to alleviate your tax burden, talk to an experienced and knowledgeable attorney so you can know for sure if this option is right for you.