Can Taxes be Discharged When Filing Bankruptcy?

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The answer is maybe or it depends upon the circumstances.  The discharge of taxes when filing for bankruptcy under Chapter 7 or Chapter 13 is possible depending upon the type of taxes and a number of factors as discussed below.

If you have outstanding taxes owed to the Internal Revenue Service or Franchise Tax Board, seek the counsel of an experienced bankruptcy attorney for assistance.  The following is a complex explanation of the requirements that must be met to allow taxes to be completely discharged when filing for bankruptcy protection.

What Requirements Must be Met to Discharge Taxes?

If taxes are owed, they are usually owed to the Internal Revenue Service or the Franchise Tax Board in California. It is highly recommended that your bankruptcy lawyer obtain an account transcript from both the IRS and FTB. There are many different types of taxes.  This article is limited to income taxes that are owed.  Generally though, taxes are dischargeable or partially dischargeable in bankruptcy depending upon the circumstances.

Which chapter of the Bankruptcy Code will also effect if all or some of your tax obligation will be discharged.  In a Chapter 13 usually a portion of non-priority general unsecured debts are paid back to creditors in the Chapter 13 Plan over three to five years.  In a Chapter 7 bankruptcy all of the tax obligation may be dischargeable.

The Bankruptcy Code mandates that all priority debts must be paid back in full when filing for bankruptcy protection.  The key to discharging a tax obligation is when does the tax obligation no longer have to be classified as a priority debt?  Once the tax obligation can be classified as a non-priority general unsecured debt, it can then be discharged in bankruptcy.  Another key point is whether the taxing entity has already obtained a tax lien against your property?  If a lien has been obtained, then the taxed owed is a secured debt, and the tax then must be paid in full.

When Does a Tax Debt Become a Non-Priority General Unsecured Debt?

Taxes owed are classified as a priority debt until:

1)     the tax debt is over three years old from the date the taxes were due at the time the bankruptcy case is filed;  if your tax return   was due April 15, 2007, it would now be over three years old;

2)   the tax debt was accessed over 240 days prior to the filing of the bankruptcy case;

3)  the tax return(s) were filed on time or at least two years before the bankruptcy case was filed;

4)  there must have been no attempt to evade or defeat the tax by filing a false return.

To summarize, a tax obligation may be dischargeable in a Chapter 7 bankruptcy or Chapter 13 bankruptcy if the taxes were due at least three years prior to the filing of the bankruptcy case, accessed at least 240 days prior to the filing of the bankruptcy case, the tax return was filed on time or at least two years prior to the filing of the bankruptcy case and there was no fraud or intent to evade the taxes.  If these requirements are met, then the tax obligation is not a priority debt, but a non-priority general unsecured debt that may be discharged in bankruptcy.