Discharging Income Tax Debt in Bankruptcy

When you meet with one of our attorneys, we will compile a list of all of your debts – credit cards, medical bills, installment notes, mortgage debts, lawsuits and even information about debts that you think you may owe, but do not yet have a formal demand for payment.  We will also ask you for information about taxes, including any federal income tax you may owe, along with income tax due to Florida or to any other state where you may have lived.

Recently one of our clients expressed surprise that our attorney was asking about income tax debt, stating "I did not think that I could even include this tax debt in my bankruptcy."

In fact, you are required by the Bankruptcy Code to include income tax debt in your Chapter 7 or Chapter 13 case, and in some cases, this tax debt can be reduced or eliminated in bankruptcy.

The question of whether your income tax can be discharged in bankruptcy depends on how old the debt is and when you filed your return.  In order to be dischargeable, your tax debt must meet the following conditions:

1. The due date for filing your tax return is at least three years ago.
2. Your tax return was filed at least two years ago.
3. The tax assessment is at least 240 days old.
4. Your tax return was not fraudulent.
5. You are not guilty of tax evasion.

Here is an example:  you filed your 2005 tax return showing $7,500 in outstanding debt on April 7, 2006.   On April 16, 2009, that $7,500 became dischargeable, meaning that it could be eliminated in a Chapter 7 filing and treated as unsecured debt in Chapter 13.

If, however, you did not file your 2005 return on time, waiting until November, 2009 to do so, your tax debt would not be dischargeable as of today (January 16, 2010) because less than two years have passed since you filed your return.

Substitute returns filed on your behalf by the IRS do not count as filings for purposes of dischargeability. Similarly, tax debt that is secured by a tax lien may be dischargeable but the lien may still be valid.  And finally, only income taxes can be discharged in bankruptcy – trust fund (941) taxes cannot be discharged.

Not surprisingly, the rules about discharging tax debt in Chapter 7 or Chapter 13 can be confusing and you are welcome to call or email our office for advice unique to your situation.