Discharging Tax Debts Through Bankruptcy

In many cases, people who are overwhelmed by unmanageable income tax debts can get relief by filing for bankruptcy. However, not all tax debt can be discharged in bankruptcy. It is important to understand the basic requirements when weighing the options for dealing with tax debts. Other debt relief solutions may be available for those whose tax debts do not qualify for discharge in bankruptcy.

When Can Tax Debt Be Discharged In Bankruptcy?

Even if a person has debts that qualify for being discharged in bankruptcy, it does not automatically mean that his or her income tax debts will also be dischargeable. Also, because each tax return and tax year is considered separately, it is possible for some tax debts to be dischargeable while others are not.

Generally speaking, an income tax debt must meet the following criteria to be eligible for discharge during bankruptcy:

  • The tax return was due at least three years ago. To eliminate a tax debt, the tax return must have been originally due at least three years before you file for bankruptcy. The due date includes any extensions that were filed in relation to the return.
  • The tax return was filed at least two years ago. You must have filed a tax return for the debt you wish to discharge at least two years before filing bankruptcy. Tax debts arising from unfiled tax returns cannot be discharged in bankruptcy.
  • You pass the "240 day rule." The tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition. An IRS assessment, or formal recognition, of a tax debt may arise from a self-reported balance due or as a result of a tax audit.

In addition to the above requirements, tax debts cannot be discharged through bankruptcy if the underlying tax returns were fraudulent, or if the taxpayer has been found guilty of tax evasion.

What Other Options Are There For Dealing With Tax Debt?

For people whose tax debts cannot be discharged in bankruptcy, there are other options that may provide relief. For example, it may be possible to work out a more manageable payment plan with the IRS, renegotiate the collection date, or even settle a tax debt for less than the amount owed. Additionally, even if a tax debt does not qualify for discharge during bankruptcy, the elimination of other debts through bankruptcy can help make the process of paying off a tax liability more manageable.

Contact Us to Discuss Your Tax Debt

This article provides an introduction to some basic considerations when dealing with tax debt, but the laws governing bankruptcy and taxes are extremely complicated and constantly changing. The rules governing the discharge of tax debt in bankruptcy can be complex. That should not discourage you from considering the possibility. Contact the experienced bankruptcy attorneys at Levitt & Slafkes, P.C., to help determine if your tax debt is dischargeable by filling out our online form, or by calling our Maplewood office at 973-323-2953.

We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.