Can I discharge tax debt through bankruptcy?
Do you owe a considerable amount in taxes? If so, you may be wondering if you can discharge your tax debt through bankruptcy. If you qualify for Chapter 7 bankruptcy, you may be able to eliminate some of the taxes you owe through the process. However, you need to understand what type of tax debt you can discharge under Chapter 7 protection.
Tax debt that is eligible for discharge
Whether or not you can discharge your tax debt will depend on several factors. First, the law only allows income tax debt to be discharged. You cannot discharge employment taxes, such as payroll taxes, or penalties associated with fraud.
Second, you must have filed a tax return at least two years before you filed for bankruptcy. The tax return must have been legitimate, and you must not have willfully attempted to defraud the IRS or evade your tax obligations.
Other factors that apply have to do with the amount of time you have owed taxes and when they were assessed. The tax debt you owe must be from a return you filed at least three years before you filed for bankruptcy, and the taxes must have been assessed at least 240 days before you filed for bankruptcy (some exceptions apply).
Tax debt you cannot discharge
As stated, the law only applies to income tax and does not include other types of taxes, such as withholding taxes, liens and certain penalties. If you have a tax lien on your property from before your bankruptcy filing, you will have to pay off the lien to clear the title before being able to sell your property.
You will also be responsible for any penalties you incurred on tax debt that is not eligible for discharge. Finally, you cannot discharge debt from erroneous or unfiled tax returns, nor can you discharge trust fund taxes.
What can I do about my tax debt situation?
Although Chapter 7 bankruptcy provides some protection for those who owe income tax, determining how best to proceed can be daunting unless you have extensive knowledge of the process as it relates to taxes. For this reason, it may be in your best interests to consult with an experienced professional. A knowledgeable bankruptcy attorney can explain your options, determine how much of your tax debt is eligible for discharge and work with you throughout the process so that you can find relief.