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Can IRS Tax Debt be Discharged in Bankruptcy?


Is it possible to discharge federal income tax debt in a Chapter 7 bankruptcy case?  The answer falls in the realm of “sometimes” and “it depends”.

A Chapter 7 bankruptcy is a “no asset bankruptcy”. A person is eligible for bankruptcy under Chapter 7 of the Bankruptcy Code, when a person’s debts exceed the total of the person’s assets. The debt must be personal (not business) income tax debt.

Tax debt can sometimes be discharged in a Chapter 7 bankruptcy. Tax debt other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy.  To know whether your particular tax debt qualifies to be discharged in bankruptcy, five (5) criteria apply, and all five (5) criteria must be met to attempt a successful discharge of tax debt under Chapter 7:

  1. The tax filing due date, including extensions, must be at least three years prior to the date of filing;
  2. The tax return must be filed at least two years prior to the date of filing;
  3.  The tax assessment must be made at least 240 days prior to the date of filing;
  4.  The tax return filed for the year in question must not be fraudulent; and
  5.  The taxpayer must not be deemed guilty of tax evasion.

Additionally, a person must prove that the tax returns for the four (4) previous years have been filed with the IRS. Those four previous tax returns must be filed no later than the date of the first creditors’ meeting in a bankruptcy case. A copy of the most recent year return must be provided to the bankruptcy court.

If all conditions above are met, it may be possible to discharge the personal liability for the tax debt.  Wait… personal liability… is there something else?  Again, “sometimes” and “it depends”.  If your income taxes qualify for discharge in a Chapter 7 case, you may have only won half the battle.  The reason is that a discharge in bankruptcy will not eliminate recorded tax liens.

Successfully emerging from Chapter 7 will discharge your personal liability on the debt (which prevents the IRS from garnishing wages, seizing bank accounts, etc.), but it will not remove a tax lien on your property if the IRS took such action before you filed your bankruptcy case.  If a lien was successfully recorded, it will remain on the property even after the bankruptcy discharge, and you will be required to pay off the tax lien in order to sell the property with clear title.

For more information and resources on bankruptcy, go to our bankruptcy page on the Drendel & Jansons Law Group website.