Can You Eliminate Tax Debts by filing for Bankruptcy?

Can You Eliminate Tax Debts by filing for Bankruptcy

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You might see advertisements on TV claiming you can erase all your tax debts by filing a special type of bankruptcy and that you must call a 1-800 number now for free information. While there is nothing wrong with asking for this free information, you should be aware that eliminating tax debts in bankruptcy is not as easy as it sounds and many a times, the type of tax debts may not be eligible. The fact is, most tax debts cannot be wiped out by bankruptcy, you will continue to owe them even if you file for Chapter 7 bankruptcy. However, you can still wipe out tax debts by filing for chapter 7 bankruptcy and by passing the means test as well as meeting ALL of the below requirements:

i) The taxes should be income taxes Taxes other than income e.g. payroll taxes, tax penalties, unemployment insurance dues or pension plan dues cannot be discharged under bankruptcy.

ii) You did not do fraud or tax evasion If you filed a fraudulent tax return or tried to hide your incomes that would have forced you to pay taxes such as using a fake Social Security Number then your bankruptcy is disqualified.

iii) The tax debt is at least 3 years old To eliminate a tax debt, the tax return must have been due at least three years before you filed for bankruptcy.

iv) You must file a tax return You must have filed a tax return for the debt you would like to discharge at least 2 years before filing bankruptcy.

v) You must pass the 240 day rule The income tax debt must have been assessed by the IRS at least 240 days before you file for bankruptcy. Or if this is not the case, then your tax return must not have been assessed yet.

Discharge of Federal Tax Liens Not Permitted

If your taxes qualify for Chapter 7 bankruptcy discharge, your success may not be a total victory because you are NOT permitted to wipe out prior recorded tax liens through bankruptcy. A Chapter 7 bankruptcy will wipe out your personal tax debts and you will not have to pay for them, as well it will prevent the IRS from garnishing your wages from your bank account. However, if the IRS recorded a tax lien on your property before you filed for bankruptcy, the lien will remain on the property and cannot be discharged. In other words, this means you will have to pay the tax lien in order to sell the property.

Tax Debts from Unfiled Returns

Tax debts arising from unfiled tax returns are not dischargeable because the IRS continually assesses tax liabilities of those people who do not file tax returns. Thus, these tax liabilities cannot be discharged unless the taxpayer files a tax return for the year in question.

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