Woman calculating her Debt

Will Bankruptcy Discharge My Tax Debt?

Law Office of Robert L. Firth  June 11, 2024

Facing tax debt is often enormously stressful, leading many individuals to wonder whether bankruptcy might provide a pathway to relief.  

The question of whether tax debt can be discharged through bankruptcy is complex, as the answer depends on several factors, including the type of tax debt, how old the debt is, and the type of bankruptcy filed.  

In other words, yes, bankruptcy can discharge your tax debt. But it depends.  

The Law Office of Robert L. Firth is here to help you understand the nuances of discharging tax debt through bankruptcy and to guide you through the process if this is a feasible option for you. Contact our Cathedral City, California, bankruptcy firm today if you're ready to discuss a strategy.   

Criteria for Dischargeable Tax Debts

For tax debt to be considered dischargeable, it must meet specific criteria outlined by bankruptcy law. These criteria include: 

  1. The tax debt must be related to federal taxes. Other types of taxes, such as payroll taxes or fraud penalties, are not eligible for discharge under any chapter of bankruptcy. 

  1. No fraud or willful evasion is allowed. If the IRS can prove that the taxpayer attempted to evade taxes through fraudulent means, then that debt is not considered dischargeable. 

  1. The tax debt in question must be at least three years old from the date it was due, including any extensions. For example, if your tax debt is from the year 2019, and was due on April 15, 2020, you would not be able to seek discharge until after April 15, 2023. 

  1. A tax return for the debt must have been filed at least two years before filing for bankruptcy. It’s important to note that returns filed late are still considered if they were filed more than two years before the bankruptcy case. 

  1. The IRS must have assessed the tax debt at least 240 days before the bankruptcy filing. This assessment period could be extended if there was a previous offer in compromise or if the taxpayer had previously filed for bankruptcy. 

Understanding these criteria and determining if your tax debt qualifies for discharge can be complicated. It’s beneficial to consult with a bankruptcy attorney who can assess the specifics of your situation and advise on the best path forward. 

Chapter 7 vs. Chapter 13 and Tax Debt

The type of bankruptcy you file — Chapter 7 or Chapter 13 — also affects the treatment of tax debt: 

  • Chapter 7 bankruptcy: This can discharge qualified tax debt entirely if all conditions are met. However, certain tax liens on your property may remain, depending on the specifics. 

  • Chapter 13 bankruptcy: This involves a repayment plan, where tax debts, even some that are not dischargeable, can be included in the plan. This option allows for paying off tax debt over time, potentially without penalties or further interest accrual. 

The Impact on Tax Liens

While bankruptcy can discharge your obligation to pay certain tax debts, it does not automatically remove tax liens that were already in place before filing.  

For example, if the IRS placed a lien on your property before you filed for bankruptcy, the lien could remain even after the discharge of the tax debt. A comprehensive strategy that includes negotiation or repayment plans for liens may be necessary. 

How Will Bankruptcy Affect Future Tax Filings?

The impact of bankruptcy on future tax filings is an area that warrants careful consideration, as it can have lasting effects on an individual's financial situation. When you file for bankruptcy and successfully discharge tax debts, there are certain implications for future tax filings that you should be prepared for.  

After filing for bankruptcy, particularly under Chapter 7, individuals may find that their ability to accumulate significant tax refunds may be limited for a few years. This is because the bankruptcy estate includes assets acquired and income earned for a certain period after filing. Thus, large refunds could be considered part of the estate and may need to be surrendered. 

It's also smart to maintain meticulous financial records post-bankruptcy and ensure full compliance with tax laws to avoid future issues with the IRS. This includes correctly reporting any debts discharged by bankruptcy on your tax returns.  

It’s advisable to work with a tax professional who can help you understand your obligations and make sure your future tax filings reflect your post-bankruptcy financial situation accurately. 

Lastly, individuals should be proactive about rebuilding their credit after bankruptcy, as this can have a positive impact on their financial future, including aspects like mortgage approvals and interest rates, which indirectly affect tax filings through deductions and credits related to homeownership. 

Address Your Questions With a Bankruptcy Lawyer

Determining the discharge ability of tax debt is intricate and requires an in-depth analysis of your financial situation and tax history.  

The Law Office of Robert L. Firth offers skilled legal guidance to California residents grappling with tax debt. We serve clients throughout Palm Springs, Palm Desert, Desert Hot Springs, Rancho Mirage, and Coachella Valley. 

If you're wondering whether bankruptcy could offer a fresh start, you're not alone. Contact the Law Office of Robert L. Firth today to explore your options and devise a strategy that aims to alleviate your financial burden while ensuring compliance with the law.  

With our experienced counsel, you can face your financial challenges with confidence and take steps toward stability.