Many people ask the question, “Are income taxes dischargeable in bankruptcy?" First of all, bankruptcy is a legal proceeding in which debt is either forgiven or reorganized so repayment can be made. Second, in limited circumstances, yes, individuals can have federal and state income taxes discharged in bankruptcy.
What does the term, “discharge" mean?
In the context of bankruptcy proceedings, “discharge" means to wipe out or eliminate. The debt does not have to be repaid ever.
What taxes can be discharged in bankruptcy?
Only federal and state income taxes can be eliminated in bankruptcy. Payroll taxes such as FICA, estate, gift, sales, and fuel taxes are NOT eliminated in bankruptcy.
What type of bankruptcy?
Only individuals can have federal income taxes discharged, not companies. And, only individuals that qualify for a chapter 7 bankruptcy may have income taxes discharged. Those who must file chapter 13 bankruptcy may have their federal income tax debt restructured so it’s easier to pay, but it is not eliminated.
What are the federal income tax discharge exceptions?
Discharge of federal income taxes is only available in limited circumstances. Basically, the debt must be older than three years, the IRS must not have filed a tax lien, and all income tax returns must have been timely filed without fraud.
Discharge is NOT available for taxes:
· due within three years prior to filing the bankruptcy petition
· assessed within 240 days of filing the bankruptcy petition
· not yet assessed but assessable
· due from a late tax return filed within two years of filing the bankruptcy petition
· hidden by fraud
What are my options if my taxes are not dischargeable?
If your situation does not fall within the limited circumstances that permit discharge of federal income taxes, you have the option of negotiating an installment agreement to pay the debt due over time. A second option is negotiating a compromise with the IRS to reduce the debt due.
Where do I get help?
Consult with a qualified attorney when considering bankruptcy or if you have any questions about the discharge of federal income taxes. Bankruptcy is a very specialized area of law; be sure your attorney focuses his or her practice on bankruptcy and attaining discharge of federal income taxes. We focus our practice on bankruptcy law and you can reach us at 513-793-6555 or Thomasjr@geygan.com (mailto:Thomasjr@geygan.com). We will gently walk you through the process and aggressively fight for your legal rights.