Can you get rid of (bankrupt or discharge) tax debts in bankruptcy? The answer is “yes”, depending on the type of taxes and other factors.
Bankruptcy tax dischargeability analysis is very tricky and even experienced bankruptcy lawyers can have difficulty accurately determining whether a client’s tax debts qualify. This will be a rather complicated and sophisticated article, but regardless of whether you completely understand it or not, you should always consult with a professional regarding your specific circumstances. Similarly, please understand that these bankruptcy laws are always changing, so what is contained in this article may not be current when you read this; another reason to always seek the advice of a bankruptcy lawyer.
How Can Taxes Be Discharged in Bankruptcy?
The most common type of tax that people owe are income taxes due to the Internal Revenue Service (“IRS”) and to their State Tax Board (in California, this is the Franchise Tax Board (“FTB”).
The issue of how much of a tax can be discharged also depends on which Chapter of bankruptcy one files. This is because in a Chapter 13 case, usually some percentage (between zero and one hundred) is repaid to general unsecured creditors, whereas in a Chapter 7 case, nothing is paid by the debtor (the debtor is the person who owes the money and files the bankruptcy chapter). Priority claims must be paid 100%, whereas general unsecured claims can be paid anywhere from 0 to 100% depending on the circumstances. Thus, the first thing to determine is whether the particular taxes in question are priority debts, or general unsecured debts. Moreover, if the taxing agency has already obtained a lien against your property, then they are SECURED by the value of whatever their lien attaches to as of the date your bankruptcy case is filed. The secured portion of the debt must be paid 100% plus interest. The unsecured portion may be paid less than 100% if, but only if, it is non-priority (general unsecured), as described above.
Priority Taxes are never dischargeable
A tax debt is priority if it is owed for a tax year for which a return was due to be filed within the 3 years prior to the bankruptcy case being filed. This period usually runs from April 15 of the year following the tax year in question. For example, if you owe taxes for 2003, and you file your bankruptcy case on May 30, 2006, these taxes are priority taxes because they were last due to be filed on April 15, 2004 and that is within 3 years of May 30, 2006. Extensions to file will change that time frame (usually to October 15 of that year).
A tax debt is also priority if it is assessed within 240 days prior to filing the bankruptcy case. This time period may be extended if an offer in compromise has been filed, or a prior bankruptcy case has been filed during that 240 day period.
OK, that’s priority. Simple rule: Priority tax debts are not dischargeable and must be paid 100%.
Additional Bankruptcy Tax Requirements
The next requirement to discharge the tax (or, in a Chapter 13 bankruptcy, to pay less than 100% of it) is that the tax returns must have been either filed on time or filed at least 2 years before the bankruptcy case was filed. And last, there must not have been any willful attempt to evade or defeat the tax or by filing a fraudulent return.
If you meet the above requirements, then you can potentially eliminate a particular year’s tax obligation in a Chapter 7 bankruptcy, or at least potentially pay less than 100% of it in a Chapter 11 or 13 case.
There are many other types of taxes (sales taxes, trust fund taxes, excise taxes, etc.). It is too lengthy to analyze everything in this one article, but suffice to say that it is possible to get rid of some tax debt in bankruptcy, so don’t just assume that you can’t. Always seek the advice of a knowledgeable bankruptcy tax attorney.