I’m frequently asked whether tax debt owed to Uncle Sam could be discharged (wiped out) in a bankruptcy Chapter 7 proceeding. The answer is yes. However, Tax debt must to fall under the following narrow rules of 11 U.S.C. §523(a)(1) and 11 U.S.C. §507(a)(8).
The 3 Year Rule: The tax return must have been last due and filed, including extensions, 3 years before the filing of the bankruptcy case. There are various issues that could extend this 3 year period, including prior bankruptcies, collection due process hearings, and filed tax return extensions.
The 2 Year Rule: The return must have been filed 2 years before the filing of the bankruptcy case.
The 240 Days Rule: The IRS must have assessed the tax debt at least 240 days before the bankruptcy case is filed. There are various issues that could extend the 240 day rule, including prior bankruptcies, and offers to compromise the tax debt.
Fraud: The tax debt cannot have been incurred by fraudulent means, including tax evasion or by filing a fraudulent tax return.
Income Tax: The tax debt must derive from income tax assessment.
Interest and penalties: If the tax debt is dischargeable so is the interest, and a penalty has to be older than 3 years old to be discharged.
Tax debt that cannot be discharged in bankruptcy: There are various tax debts that cannot be discharged in a bankruptcy proceeding, including tax liens that have been recorded prior to the bankruptcy case, and unpaid withholding taxes, such as Social Security and FICA.
The first step in determining if your tax debt could be discharged in a bankruptcy proceeding is to request a tax transcript from the IRS. The tax transcript will inform you, among other things, of assessment dates and filing dates. You can obtain your transcript here
Obtain a Bankruptcy Consultation from an experienced lawyer before you file a Chapter 7 Bankruptcy. A bankruptcy attorney could help you file for bankruptcy and protect your assets.
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