Tax Debt Relief in Bankruptcy: Plan Before You File

You may have heard that taxes are not discharged in bankruptcy. Tax debt, as “priority” debt, gets paid first before other creditors in bankruptcy. However, the Bankruptcy Code includes exceptions depending on the type and timing of the tax, and the bankruptcy chapter filed.Before knowing which taxes qualify for discharge, however, you must first understand which do not qualify under bankruptcy law. There are 7 types of taxes you cannot avoid paying:

• Taxes on a past due return not filed within three years (plus extensions) before filing bankruptcy.
• Taxes assessed within 240 days before filing bankruptcy.
• Assessable taxes not yet assessed.
• Taxes on a late tax return filed within two years of bankruptcy.
• Taxes on a fraudulent tax return or tax evasion.
• Tax returns filed by the IRS for a taxpayer.
• Customs duties for goods entering the country over a year.

All taxes that do not fall under any of the above categories may qualify for discharge in bankruptcy. A debtor may avoid paying taxes on the following:

• Federal income taxes if older than three years from when taxes assessed (240 days).
• Employment withholding taxes but only the employer’s contribution if otherwise qualified for discharge.
• Past due property taxes over a year.
• Excise taxes (estate, gift tax, sales, or fuel) on an un-filed return three years past due or on events occurring over three years before bankruptcy.
• Employment taxes on an un-filed return three years past due before bankruptcy but not on earned wages.
• IRS Tax liens for unpaid taxes.

The rules for discharging taxes in a Chapter 13 plan for debt payment over time differ from a Chapter 7. In Chapter 13 bankruptcy, some taxes and penalties on late filed tax returns and fraudulent tax returns may qualify for discharge. Bankruptcy Rules on tax debt relief are especially complicated. Therefore, consultation with a Tampa chapter 7 lawyer for your bankruptcy is crucial; contact us before you consider your bankruptcy options.