It’s not the easiest task in the world, but it is possible to discharge taxes in bankruptcy. Most tax debts are exempt from discharge during Chapter 7, and in Chapter 13 you are required to pay them in full, but if you meet certain requirements, Chapter 7 bankruptcy may wipe out your owed income taxes.
Requirements for Discharging Taxes
- Income Tax – No other taxes may be discharged in bankruptcy.
- Filed a Tax Return – You have to have filed a tax return listing the income tax you want to discharge at least two years prior to filing. If you filed a late return, which means all extensions expired and a substitute was filed on your behalf by the IRS, then some courts will say that you did not file and are therefore not eligible.
- Three Years Old – In order to get a discharge, the taxes in question need to have been filed on the tax return at least three years ago.
- 240-Day Rule – The IRS needs to have assessed the debt at least 240 days prior to filing. If there was a compromise offer or a previous bankruptcy that prompted the IRS to halt collection activity, the 240 days could be extended.
- No Fraud – Filing a fraudulent tax return or attempting tax evasion will likely ruin your chances.
No Discharge for Federal Tax Liens
If you do meet the above requirements, then the tax discharge may still go awry if the IRS has a tax lien on any of your property. Federal tax liens will not be discharged by bankruptcy and you will still have to pay them off in full before you can sell the property.