Can Bankruptcy Eliminate My Tax Debt?

Bankruptcy allows debtors to reorganize or discharge most of their debts. For many unsecured debts, like credit card bills, a Chapter 7 bankruptcy can wipe out the debt entirely. But not all debts are treated the same under the Bankruptcy Code. For example, while you may be able to discharge some tax debt through bankruptcy, there are special rules that apply.

Income Taxes and Bankruptcy

Many types of tax debt cannot be discharged through a Chapter 7 bankruptcy. This includes recent property taxes, tax liens against your property, and taxes that you are required to collect as an employer (such as FICA and income tax withholding). The one type of tax you may be able to discharge is personal income taxes.

But not all income taxes can be discharged either. The Bankruptcy Code establishes certain criteria. First, the income tax owed must be from a return that was due at least three years before you sought bankruptcy protection. In other words, if you file for bankruptcy in May 2015, you cannot seek discharge of any income tax based on a return due before May 2012. In practice, this means you cannot discharge tax debts past the 2011 tax year, since that return would have been due on October 15, 2011, because the three-year rule accounts for the six-month automatic extension to file a return.

Second, the income tax return must be filed two years before you seek bankruptcy protection. A bankruptcy judge may refuse a discharge of a tax debt if you did not file the return on time. Nor can the return be fraudulent or constitute an attempt at tax evasion.

Third, the income tax itself must have been “assessed” at least 240 days before your bankruptcy filing. Note the date of assessment is not the same as the date that you filed your tax return. Assessment refers to the date the Internal Revenue Service enters a tax debt onto its records. The IRS has three years from the date a return is filed to make an assessment.

Alternatives to Bankruptcy

If you owe income tax to the IRS and are unable to pay, there are alternatives to bankruptcy. The IRS offers monthly payment plans to individuals who owe less than $50,000 in taxes. If you are unable to pay your tax debt even with a monthly payment plan, you may apply for an “offer in compromise,” whereby the IRS may agree to accept less than the full amount that you owe.

Bankruptcy and Future Taxes

Filing for bankruptcy does not eliminate your need to continue filing tax returns. You are required to file all required tax returns for the four years prior to your bankruptcy filing. You must also file any required returns during the time your bankruptcy case is pending. You should also pay any current taxes as they become due. If you do not file returns or make current payments, a bankruptcy judge may dismiss your case.

Get Help From a Florida Bankruptcy Lawyer

Taxes are just one of many issues you need to consider before seeking bankruptcy protection. An experienced Miami bankruptcy attorney can assist you in deciding the best course of action. Contact the Law Office of Julia Kefalinos today if you need to speak with someone right away.