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Can I Discharge My Income Tax Debt?

The concept of tax settlement.

There is a common misconception that federal tax debts are not dischargeable in bankruptcy. Income tax debt can, in fact, be discharged, although discharge is subject to additional rules and restrictions beyond typical debt discharge. Whether your tax debt is dischargeable depends on the circumstances of the debt, the nature of the taxpayer, and the type of bankruptcy filed. For many taxpayers, this may come as a relief; tax delinquency can come with unfortunate consequences including restrictions on your passport. If you are facing oppressive back taxes, filing for bankruptcy may be the right move. A seasoned Southern California debt relief attorney can help you assess the taxes and other debts you owe to determine if bankruptcy is the solution for you.

Tax Debts That Are Not Dischargeable

Priority tax debts cannot be discharged in bankruptcy. In a Chapter 13 repayment plan, these taxes must be repaid in full over the term of the Chapter 13 Plan. Under Chapter 7, tax debts that are considered priority debts are not dischargeable and will remain due after the bankruptcy case is closed. In addition, if any of the bankruptcy estate assets are liquidated in a Chapter 7 case, these taxes will be paid to the extent that the assets allow. Of note, some tax debts owed to the government, such as payroll taxes or fraud penalties, cannot be eliminated in bankruptcy.

Tax Debts That Are Dischargeable Under Certain Circumstances

First and foremost, whether you can discharge federal or state income tax debt depends on whether the tax debt satisfies certain criteria.  In order to discharge tax debt in bankruptcy, the income tax debt must satisfy the following requirements:

  • The due date for filing the tax return must be at least three years before seeking discharge;
  • The tax return must have actually been filed by the taxpayer at least two years ago;
  • The tax assessment must be at least 240 days old;
  • The tax return must not have been fraudulent in any way;
  • The taxpayer must not be guilty of tax evasion.

The first three rules often cover the same time period but allow for circumstances in which the return was filed late or where an IRS assessment was triggered later. The final two rules require that your tax return was filed correctly and in good faith. If you have outstanding tax debt because you tried to evade the tax laws and were caught, your debt will not be dischargeable.

There are a few additional technical rules that must be followed when seeking discharge of tax debt, with which your dedicated bankruptcy attorney can help. Additionally, it is important to note that a Chapter 7 discharge will remove only your personal obligation to pay the debt (i.e., will protect your bank account and wages), but will not remove any existing federal or state tax liens. If the IRS put a lien on your property before you filed for bankruptcy, you will normally have to pay off the tax lien in order to sell the property but there may be circumstances in which the lien can be removed.

Talk to an Experienced Southern California Bankruptcy Attorney

If you or your company are struggling with debt and considering bankruptcy, please contact Rounds & Sutter for a free consultation. With offices in Ventura, Santa Barbara, and Westlake Village, we represent clients throughout Southern California, offering smart, compassionate legal counsel in the face of life’s challenges.