If you intend to file for bankruptcy, it helps to know crucial information on what is dischargeable or not. Maybe you are asking if tax debt is dischargeable under Chapter 7 or Chapter 13 bankruptcy.

Most tax debts are not dischargeable in bankruptcy. You will still owe them at the end of a Chapter 7 bankruptcy case. And, you will have to repay them in full in a Chapter 13 bankruptcy repayment plan. Chapter 7 is most likely the better alternative if you need to discharge tax debts. That is, if you are eligible for Chapter 7 bankruptcy, in the first place. Keep in mind that tax debt is dischargeable only if it meets the following conditions:

1. The tax debt is income tax debt.

You may only discharge income taxes in bankruptcy. Taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy. On the other hand, the good news is that any interest accrued on dischargeable tax debt may be wiped out. Also, penalties are dischargeable even if the tax debt is not.

2. The tax debt is at least three years old.

For tax debt to be dischargeable, the tax return must have been originally due at least three years before your bankruptcy filing. This date includes any extensions.

3. There is no fraud or willful evasion.

The tax return filed must not have been fraudulent or you must not have willfully evaded paying your taxes. If you filed a fraudulent tax return, such as using a false Social Security number, bankruptcy cannot help. Willful evasion is deliberately reporting less income than what was earned or deducting fictitious expenses. This will also cost you the discharge of your income tax debt.

4. You pass the “240-day rule”

The income tax debt must have been assessed at least 240 days prior to the filing of bankruptcy. However, if the taxing authority was prohibited from making an assessment (e.g. previous bankruptcy filing or offer in compromise), the time limit may be extended.

5. The tax return 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. The date the return was filed is the measuring date.

If your tax debt meets the above conditions and you file for Chapter 7 bankruptcy you are eligible for a complete discharge of the debt. On the other hand, under Chapter 13 bankruptcy, you must repay some or all of the qualified tax debt. Repayment is relative to your income and assets, through a three to five-year repayment plan.

If you have any tax debt, you should not delay in contacting us. We can advise you on the best legal remedy to your tax problems.