There is a myth that income taxes can never be discharged in bankruptcy.
For individuals or families facing economic difficulties taxes can be particularly difficult to overcome because of penalties and interest that accrue. In reality, you can discharge your back federal, state, and local income taxes in Chapter 7, Chapter 13, and Chapter 11 bankruptcy.
Making a determination on which taxes are capable of being discharged can be complicated. However, it is possible to discharge entire tax debts in bankruptcy, if the taxes fall within three important requirements:
- 3-Year Requirement. The first requirement is that for taxes to be dischargeable, they must become due at least three years before you file for bankruptcy. Bankruptcy CodeB B’507(a)(8)(A)(i).
- 2-Year Requirement. Second, your income tax returns must have been filed two years before filing your bankruptcy petition. This means you can discharge income taxes, even if you filed your tax forms late, as long as two years have passed since the tax returns were filed and your bankruptcy was filed. In the event that you have not filed your taxes for a particular year, the taxes assessed for that year are not dischargeable. B’523(a)(1)(b)(ii).
- 240-Day Requirement. The third requirement is the taxes must be assessed at least 240 days before you file for bankruptcy or not assessed at all. B’507 (a)(8)(A)(ii). In many situations, the date of assessment is on or around the date you filed your income tax form. If the amounts owed are changed due to IRS audit or you file a correction, the assessment date may be different.
Additionally, interest and penalties accrued from income tax debts may be dischargeable as well. Basically, if the taxes assessed by a taxing authority are determined to be dischargeable, the penalties and interest associated with them are dischargeable too.
If you are facing significant tax debts and considering bankruptcy, I would encourage you to speak with an experienced bankruptcy attorney to determine if you are able to discharge your tax debts in a Chapter 7, Chapter 13 or Chapter 11 bankruptcy.