Whether you can discharge (eliminate) tax debts in Chapter 7 bankruptcy depends on what type of taxes are owed, when they first became due, and why you haven't yet paid them. Here’s a rundown of which tax debts are and are not dischargeable in Chapter 7 bankruptcy.
Tax Debts That Are Never Discharged in Chapter 7 Bankruptcy
Some tax debts can never be discharged through Chapter 7 bankruptcy. These are:
Income taxes based on fraud. If you owe income taxes because you didn’t file a tax return or were avoiding your tax obligations with the IRS or other taxing authority, you cannot discharge them in bankruptcy. If the IRS filed a tax return on your behalf, this doesn’t count as being filed by you – so they are also nondischargeable.
Recent property taxes. You cannot discharge property taxes unless they became due more than a year before you filed for bankruptcy.
Business-related taxes. Payroll taxes, excise taxes, and custom duties cannot be discharged.
Sales, use, and poll taxes. These are probably not dischargeable in bankruptcy.
Tax Debts That Can Be Discharged in Chapter 7 Bankruptcy
You should be able to discharge income tax debts if they meet the following criteria:
You didn’t willfully evade payment of your taxes. If you deliberately attempted to skip out on paying your taxes in any form, through forged paperwork, untrue accounts, or other forms of fraud, your tax debt will not be forgiven under Chapter 7 bankruptcy. “Willful tax evasion” is a subjective standard, and is determined by the view of the IRS personnel making the judgment.
You filed a return two years before filing for bankruptcy. You must have filed a tax return for the tax in question at least two years before you filed your bankruptcy petition. A Substitute Return, filed by the IRS on your behalf, doesn’t count.
The tax debt is 3 years old or more. The tax return for the tax debt must have been due at least three years before you filed for bankruptcy. If you got an extension to file the return, the three-year clock begins ticking on the due date granted by the extension.
240 days have passed since the IRS assessed the debt. The IRS must have assessed your liability for the tax debt at least 240 days before your bankruptcy filing. This time period is extended if the IRS suspended collection because you were negotiating with the IRS for an offer in compromise.
Tax Liens Remain After Bankruptcy
If the IRS or other taxing authority had recorded a tax lien on your property before you filed for bankruptcy, the lien remains on your property even if the underlying tax debt is discharged. That means you will be required to pay the tax lien out of any proceeds from a sale of that home.
There are a few situations where debtors are able to get rid of tax liens on their property. To learn more, see Will Filing for Chapter 7 Bankruptcy Remove a Tax Lien?