Can I Discharge The Taxes I Owe in Bankruptcy?
Many people are under the impression that you are forever stuck with tax liabilities and that it’s not even possible to discharge tax debt in a bankruptcy. The truth is that some taxes can be discharged and others you cannot. Timing plays an important part in that determination.
This is why it’s important to speak with a bankruptcy lawyer with the knowledge and experience to make sure you understand what may and may not be discharged and what you must do to get the discharges you are entitled to. I hope this article gives you some idea of the requirements, but give me a call if you want a better idea of how this all applies to your particular circumstances.
Income Taxes Are Often Dischargeable
It’s true. Income tax debt is dischargeable under certain fairly common circumstances.There are 4 basic requirements to get your income taxes discharged in bankruptcy.
1. The Tax Return Was Due 3 or More Years Ago
Only the unpaid income taxes from returns due at least three years before you file for bankruptcy can be discharged. If the income taxes became due less than 3 years ago, they will not be discharged in a bankruptcy. For instance, for 2016 taxes due in April of 2017 the income taxes due may be discharged as long as your bankruptcy petition is filed after April 2020, though there are exceptions.
2. The Return Was Filed Two Years Ago or More
The tax return was filed two years (or more) before you file for bankruptcy. In many cases, a late return will not count and you can’t discharge the taxes owed that are related to a late return. By late, we mean that you filed after the legally entitled extensions have run. However, in some states the bankruptcy courts allow tax discharge even if the return is filed late as long as you meet all the other requirements.
3. The Taxes Were Assessed At Least 240 Days Ago
The taxing authority, state or federal, must have assessed the tax at least 240 days before you file for Chapter 7 bankruptcy. Sometimes the time limit is extended such as when an offer in compromise offer was made or if you filed for bankruptcy in the past. So, it’s important to be aware of those factors.
4. There Was No Willful Evasion or Fraud
In order for the income taxes to be dischargeable you cannot be guilty of intentionally trying to evade the liability. For those who file jointly, the authority assessing the liability will need to prove that both you and your spouse committed fraud related to a return or that you both tried to evade the taxes for you to be denied a discharge of the debt.
Real Estate Taxes More than 1 Year Old May Be Discharged
It’s also possible to discharge real estate taxes that are more than 1 year old. That means that you will not personally be liable for those taxes. However, if the town placed a lien on your real estate, the lien remains, which can be problematic. Make sure you discuss the ramifications with your bankruptcy lawyer.
Examples of Taxes That Cannot Be Discharged
While income tax debts and older real estate tax debts may be able to be discharged, that doesn’t apply to other types of tax debts. The debts that cannot be discharged during bankruptcy include the following:
- Tax Liens – While the requirement to pay a tax may be removed through bankruptcy, tax liens will remain. However, this applies only to liens on your property prior to you filing for bankruptcy. Even though you may not be personally required to pay the tax debt, you’ll still have to pay to discharge the lien from the net proceeds when you sell your property, subject to the applicable staute of limitations on liens.
- Third-Party Trust Taxes – Taxes like Medicare, FICA, and income taxes withheld by an employer and held in trust for others are not able to be discharged. This also applies to sales taxes paid by customers that must be paid to a government unit.
- Specific Employment Taxes – Generally, employment taxes, customs duties, and excise taxes cannot be discharged depending on the time frame.
This is a general overview of which taxes may or may not be discharged. But it is a complicated subject and there are many exceptions and conditions. The good news is that even when taxes are not dischargeable, they may be included in a Chapter 13 payment plan.
In a Chapter 13 plan the bankruptcy court will determine the amount of the monthly payments you will be required to pay. There are several benefits to filing a Chapter 13, such as possibly removing second mortgages from your house, that make paying your overdue taxes through a Chapter 13 plan very beneficial. Contact us to get a more complete review of the dischargeability of your tax liability.