Cobos Law Firm Blog

If you’ve ever owed money to the Internal Revenue Service (IRS) or state taxing authorities, you know that interest and penalties can add up in a hurry, racking up a tremendous tax debt. Carrying tax debt means also carrying the burdens associated with it:  Tax refunds will be seized until the debt is repaid, and liens will be recorded against you, clouding title to any property you own. If you are behind in payments, your bank account can be levied. The government always gets its money. Or does it?

If your tax debt is relatively old and certain other conditions are met, your tax debts can be discharged in a Chapter 7 bankruptcy. To discharge a tax debt, the following must exist:

• You filed a tax return for the year (or years) in question. The return must not have been fraudulent.
• The debt you want discharged must be for a tax return that you filed at least two years before you filed your bankruptcy petition. A “Substitute for Return,” completed by the IRS on your behalf which you did not sign or consent to does not qualify.
• The tax return for the debt you want to discharge must have been due at least three years prior to the filing of your bankruptcy petition.
• The IRS must not have assessed your liability for the taxes within the 240 days before you filed your bankruptcy petition.
• You have not willfully evaded paying your taxes.

The first step in determining whether your tax debts are dischargeable is obtaining your account transcript from the IRS or your state taxing authority. This transcript will show you the dates returns were filed, or obligations became due. If all five of the above conditions are met, your tax debt is likely to be discharged.

Penalties that were imposed on a dischargeable tax debt are also dischargeable, which is important given the onerous sums typically imposed. If your underlying tax debt is not dischargeable, some courts may allow for the discharge of the penalties.

Note that if you incurred other debts in order to pay off non-dischargeable tax debts, those debts are not dischargeable. For example, if you made payments using your credit card to pay off non-dischargeable tax obligations, you will not be permitted to discharge that credit card debt in a Chapter 7 bankruptcy.

If your tax debts are successfully discharged, any liens placed on your property could remain in effect. This means that the IRS or state government may not seize your bank account or wages to collect the debt, but if you want to sell your property, you will have to pay the debt in order to clear title to the property.

Tax debts that cannot be discharged in a Chapter 7 bankruptcy may be eligible for repayment without penalties or interest in a Chapter 13 bankruptcy proceeding. Bankruptcy is not a one-size-fits-all approach. An experienced bankruptcy attorney can help you determine whether your outstanding tax bills are dischargeable and whether you should file under Chapter 7 or Chapter 13 of the bankruptcy code.  Call us for a consultation.