In Chapter 13 bankruptcy cases, some types of tax debts may be discharged and others you’ll have to pay in full through your Chapter 13 plan. If your tax debt is secured by an IRS tax lien, the bankruptcy might discharge your personal liability for the debt, but the lien will remain.
How tax debts are treated in Chapter 13 bankruptcy depends on the timing of your bankruptcy and the classification of the debt as secured, priority, or unsecured. Read on to learn more.
(To learn more about Chapter 13 bankruptcy and the Chapter 13 repayment plan, see our Chapter 13 Bankruptcy topic area.)
Getting Information on Your Tax Debts
In order to figure out what will happen to your tax debts in Chapter 13 bankruptcy, you need to get information on the timing of the debts and whether the taxing authority has filed a lien securing the debts. Start here:
IRS tax account transcripts. Your tax account transcripts provide a detailed history about each year’s tax information. The information includes the date of filing the return, the date of the assessment of the tax, whether any events occurred that stopped or tolled the time periods, and whether any liens have been recorded against property the taxpayer owns.
Land records. County land records will let you know if the IRS has properly recorded a lien against your property. (You may need to consult with a local bankruptcy attorney to determine if the lien was “properly” recorded.)
If the IRS Has Recorded a Lien – Secured Tax Debts
If the IRS has recorded a lien against your property, then the tax debt is a secured debt for bankruptcy purposes. If the debt meets the criteria for dischargeability (see below), your personal liability might be discharged through the Chapter 13 bankruptcy. However, the tax lien will remain. This means that if you don’t pay off the entire amount of the lien (with interest) during your bankruptcy case, the IRS can seize your property after your bankruptcy to get paid.
When the Tax Debt is Unsecured
In order for your tax debt to be discharged, it must meet five criteria.
- The most recent due date for the return must be more than three years before the bankruptcy filing.
- The return must have been filed more than two years before the bankruptcy filing.
- The tax claim must have been assessed more than 240 days before the bankruptcy filing.
- The tax return must have been a non-fraudulent filing.
- The taxpayer must not have engaged in a willful attempt to defeat or evade the tax
If your tax debt is not secured debt and meets the above criteria, it is classified as an unsecured debt. This is generally the most advantageous classification for debtors as general unsecured claims are paid a pro rata distribution, meaning that after secured and priority debts are paid, these claims are paid from what is left over. And at the end of your repayment period, the remaining debt is discharged.
(To learn more how unsecured debts are treated in Chapter 13 bankruptcy, see the Chapter 13 Repayment Plan.)
When Tax Debts Are Priority Debts
If the IRS or other taxing authority has not recorded a lien, and the debt doesn’t meet the above criteria for dischargeability, it is a priority debt. You must pay priority debts in full in your Chapter 13 plan. Unfortunately, some categories of nondischargeable taxes will continue to accrue post-petition interest that the taxing authority may attempt to collect after your case is finished.
Proofs of Claim and Your Tax Debts
You must list all of your tax debts on your bankruptcy papers, as well as the taxing authorities that you owe the debts to. The taxing authority then has 180 days to file a proof of claim indicating what tax debt you owe. If the taxing authority does not file a proof of claim, its claim may be discharged without any payment.
The Trustee’s Commission on Tax Debts
Any disbursements that the bankruptcy trustee makes to taxing authorities during your Chapter 13 repayment period will be subject to the Chapter 13 trustee’s commission. The trustee’s commission is reassessed periodically and depends on the amount of funds disbursed in the trustee’s district. The trustee’s commission cannot exceed 10% of the payment made. For example if the trustee disburses a payment of $100 to the IRS and the trustee’s commission is at the maximum 10%, then the trustee’s fee is $10 for this transaction.
Post-Petition Tax Debts
If you incur additional tax debt after you file your Chapter 13 bankruptcy case, the debt may be added to your case as a post-petition debt and paid through your Chapter 13 plan.