What Federal Income Taxes can be Discharged in Bankruptcy?

Specific conditions need to be met to include federal tax debt in a bankruptcy.

Trying to include taxes owed to the Internal Revenue Service (IRS) in a bankruptcy petition can take place under strict conditions set by the U.S. Bankruptcy Court.

In the case of a Chapter 7 Bankruptcy, the most common form of personal bankruptcy, federal income taxes can be discharged only when the taxes due are more than three years old, they were assessed on prior returns at least 240 days before the bankruptcy was filed and the debtor did not file a fraudulent tax return or try to avoid paying taxes.

In addition, tax debt will be considered by the court if the IRS has not already filed a prior tax lien on the debtor's assets. "If they have, the lien survives bankruptcy, which means that the government may still seize property to collect the discharged tax debts," according to the legal website FreeAdvice.com.

In the Florida Bar Journal, attorney Larry Heinkel advises debtors that attempting to have tax debt discharged in a bankruptcy is generally more beneficial than agreeing to an IRS plan called "offer in compromise," which will require payments to be made for an extended period of time.

For bankruptcy cases filed under Chapter 13, which requires that debtors agree to a repayment plan ordered by the court, the IRS must be paid regularly along with other creditors. However, if the debtor does not stay current on taxes assessed after the bankruptcy is approved, the repayment plan could be placed in jeopardy.

Georgia attorney Jonathan Ginsberg contends that in Chapter 7 cases, any federal tax lien that has been filed against property before bankruptcy should attach only to the equity that the debtor has at the time the petition is filed. "Subsequent appreciation or increase in equity does not accrue to the benefit of the taxing authorities," he states on the Ginsberg Law Offices blog.

Ginsberg also warns debtors to be up to date on their tax returns, and to file all tax documents including amendments before the 341 meeting of creditors takes place in front of a bankruptcy trustee. Not doing so could disrupt the bankruptcy process.

"Many bankruptcy trustees will not hold your 341 meeting of creditors hearing if you have missing tax returns from the last four years," he said. "The point here is that bankruptcy trustees want to know if you have non-dischargeable tax liability because it affects the administration of your case."

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