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Bankrupt and Facing Overwhelming Tax Debt?

Tax season has begun again, which brings to mind a question bankruptcy clients facing tax debt often ask: does filing bankruptcy remove tax debt? This blog discusses the dischargeability of income tax debt.

Is Income Tax Debt Dischargeable?

The general rule is that income taxes are not dischargeable. However, there is an exception. Your IRS tax debt is dischargeable in bankruptcy if:

  • Your tax returns have been legitimately filed and assessed for the last three years
  • Your tax returns were due for more than three years prior to the bankruptcy filing
  • Your tax returns have not been fraudulent
  • You were not trying to evade your taxes by failing to pay
  • The IRS has not yet filed a secured lien against your property

You can discharge tax debt that falls under the exception through an adversarial proceeding in Chapter 7 bankruptcy or through filing for Chapter 13 bankruptcy. If this tax debt is discharged, you must notify the IRS or the IRS may claim that it was never discharged.

What About Non-Dischargeable Tax Debt?

Tax debt that does not fall under the exception above is considered non-dischargeable. For example, if you did not file your tax return, you will not be able to discharge any tax debts from that return.

Filing for Chapter 13 bankruptcy is often the best route to take when you have substantial tax debt. Through a Chapter 13 bankruptcy Wage-Earner's Plan, you may be able to pay back your non-dischargeable tax debt with zero interest. This can save thousands of dollars a year in interest.

You may also enter into an "offer in compromise" with the IRS. If the IRS agrees to an offer in compromise, you will be able to pay less than you owe on your tax debt.

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