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Relief under the Bankruptcy Code can provide relief from the tax collector (IRS) and discharge (cancel/eliminate) some income taxes and other taxes. However, discharging taxes in bankruptcy can be tricky and a knowledgeable attorney can help you determine if your taxes can be discharged. Some taxes and penalties are dischargeable and others are not. Those that cannot be discharged can be paid without interest in chapter 13. The automatic stay in bankruptcy even stops collection actions by state and federal taxing authorities, including seizure and garnishment, usually during the entire bankruptcy case as soon as the petition is filed.
The relief available in bankruptcy depends on a number of factors including: (1) the kind of tax involved; (2) the age of the tax debt which determines if it has priority status; (3) whether/when a return was filed; (4) the chapter of bankruptcy selected; and (5) if the IRS/Tax Agency has filed a lien on you/your assets. Taxes that are priority taxes cannot be discharged, but unsecured non-priority taxes can be discharged and eliminated from your life forever.
Federal Income Taxes (IRS)
Federal income taxes (IRS) are unsecured non-priority if the tax return was last due to be filed more than three years before your bankruptcy petition was filed and then it can be discharged. This period usually runs from April 15 of the year following the tax year in question. For example, if you owe taxes for year 2008 then the return is last due on April 15, 2009. Thus, you would have to file bankruptcy after April 15, 2012 (3 years) to be able to discharge the tax debts for 2008. If you filed your petition before April 15, 2012 then taxes for year 2008 are priority taxes and are not discharged no matter how long your bankruptcy case takes. If you received an extension to file a return, the three-year clock starts after the last extension. Also, if your file your return late you have a two year waiting period to file bankruptcy and discharge that year’s tax.
A tax debt is also priority and not discharged if it is assessed by the IRS within 240-days prior to filing the bankruptcy case. This time period may be extended if an offer in compromise has been filed, or a prior bankruptcy case has been filed during that 240-day period.
The rule of thumb: Priority tax debts are not dischargeable and must be paid 100%. If the taxes are unsecured non-priority debts they can be totally discharged in chapter 7 or be paid off in cents on the dollar in chapter 13 without interest and the large balance of the tax debts are discharged. But there must not have been any willful attempt to evade or defeat the tax or by filing a fraudulent return or the income taxes would not be discharged if pursued by the IRS. If your tax debts are priority and you cannot wait 3 years to file bankruptcy an offer in compromise with the IRS may be a better solution to deal with large tax debts and liens.
Tax Liens
Note that bankruptcy will not wipe out prior recorded tax liens, generally. A chapter 7 bankruptcy will wipe out your personal obligation to pay the debt, and prevent the IRS from going after your bank accounts or wages, but if the IRS recorded a tax lien on your property before you file your bankruptcy case, the lien will remain on the property. In effect, this means you will have to pay off the tax lien in order to sell the property. But the unavoidable lien on a tax that is discharged will not affect new assets acquired by the debtor after a discharge. However, the good news is that IRS liens can be avoided and discharged for any portions that are unsecured by any equity in the property securing the tax debt at the time the petition is filed. Prior secured creditor’s perfected liens are valued before the IRS lien which can leave some or the entire IRS lien unsecured and dischargeable if action is taken to avoid the lien in bankruptcy.
Property, Excise, Sales, Estate and Gift Taxes
Property taxes more than one year old can be discharged but the lien remains on the property unless it is unsecured by insufficient remaining equity on the property. Excise taxes, such as sales taxes, estate and gift taxes, among others, can be discharged if they are over three years old.
A seasoned bankruptcy attorney can assist you in eliminating the tremendous tax debts enforced by the IRS and our tyrannical governments and be liberated from an overwhelming situation with the IRS, Florida Dept. of Revenue, and local governments.