23 January 2019

Dischargeability of Tax Debt

The most important effect of a bankruptcy case is the discharge that a debtor receives once they have completed their bankruptcy case. A discharge of a debt means that your legal liability for having to pay the debt is eliminated.

Creditors can no longer claim that you owe them money and they are barred by the discharge injunction from seeking collection of the debt.

When the bankruptcy case is completed, all debts that existed prior to the time you filed your bankruptcy case are discharged with the exception of those debts determined to be nondischargeable.

I know, this seems like a lot of unnecessarily long words to describe a basic concept: certain debts you can get rid of in bankruptcy and certain debts you cannot.

One type of debt that is nondischargeable is tax debt. If you owe money to a federal, state or local government usually you will not be able to get rid of this debt.

This is not a bright line rule, however, and certain debts can be discharged if the taxing authorities have taken too long to pursue their claim against you for prior year tax debt. The magic number for tax debts is three years.

If the tax was originally due more than three years prior to the filing of your case then this is the first step towards having a debt that can be

Next you must look at whether the tax debt has been assessed within the last 240 days, or at all. For this, it is a good idea to obtain your tax account transcripts and records from the IRS or state taxing authority.

This will let you know if they have assessed the debt in the last 240 days, how much they are claiming and for what years. You will also be able to see if they have tax returns on file for you for the relevant years.

Once you have determined that the debt is more than three years old and has not been assessed in the last 240 days, there are only a few ways the government can still avoid discharge or collect the debt.

The government can do this if you did not file your tax return at least two years prior to your bankruptcy filing, you filed a fraudulent tax return or you willfully evaded paying taxes. The last two of these defenses are difficult to prove, so the one that usually trips most people up is their failure to file a tax return, and also, their failure to keep a record of the filing so that they can prove it in court.

Finally, if the government has already filed a tax lien or levied against your property, their debt will be treated as secured in bankruptcy and this could affect your ability to keep the property in your bankruptcy case.

While there are several complicated rules and exceptions with respect to tax debt, the most important things you can do to limit your liability are:

  1. File your tax return on time.
  2. If you have not filed a tax return, file as soon as you can.
  3. Keep Records.
  4. Think carefully before entering in compromise with the government.
  5. Time the bankruptcy for after the three-year and 240-day periods have expired but before the IRS files a Notice of Federal Tax Lien against you.

I have had many a debtor tell me they filed their taxes but the IRS or state is saying they do not have anything on record. Without having the records to prove that you filed your tax return.

Also, it is important that if you have Another point to note is that tax debt often carries with it interest and penalties for nonpayment. In these cases, interest follows the tax.

If the tax is successful Chapter 13 plan discharges all penalties and post.

Call Today for a Free Consultation:

tags: Bankruptcy, Discharge, Creditors' Rights, Tax Debt, Debt Collection, Chapter 7, Chapter 13, Chapter 11
Jonathan B. Vivona

Jonathan B. Vivona

Jonathan B. Vivona is the founder of our firm and is based in Alexandria, VA. He has represented bankruptcy clients in the Northern Virginia area for his entire professional career.

Read More