Some types of tax debts may be eligible for elimination under the Chapter 7 or Chapter 13 bankruptcy code. There are many rules and conditions as to which types of tax debts are dischargeable. The bankruptcy law outlines specific criteria for tax debt eligibility.
A tax debt can be discharged if it meets the following conditions:
(1) The taxes are income taxes.
(2) The taxes were not accrued fraudulently and/or there was no attempt to evade payment.
(3) A tax return was filed for the debt seeking to be discharged.
(4) The debt is at least three years old from the time of filing for bankruptcy.
(5) The income tax debt has been assessed by the IRS at least 240 days prior to filing for bankruptcy.
Some tax debts are not dischargeable. Payroll taxes, penalties for fraud, or tax debts that arise from unfiled tax returns can not be eliminated in bankruptcy.
Tax and Bankruptcy
The debtor is required to file a tax return even if they plan to file for bankruptcy. The court requires the debtor to provide a copy of their most recent tax return. Once the bankruptcy petition has been filed, the trustee is responsible for filing income tax returns for the bankruptcy estate. After the bankruptcy case has been dismissed, any remaining assets in the estate are returned to the debtor, without any tax consequences.