Discharging Taxes Through Chapter 7 Bankruptcy

When Can You Discharge a Tax Debt

Under current bankruptcy law. you can discharge (eliminate) federal income tax debts through Chapter 7 if ALL of the following are true:

The taxes you are discharging are income taxes. Taxes other than income. such as payroll taxes or fraud penalties, can never be discharged in bankruptcy.

The income lax debt is at least three years old. in order to qualify for a discharge of your income

tax debt, the taxes due must be at least three yours old.

You did not commit fraud or willful evasion. if you filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes. such as using a false Social Security number on your tax return. bankruptcy can't help.

The debt is at least three years old. To eliminate a tax debt. the tax return must have been originally due at least three years before you filed for bankruptcy.

You filed a tax return. You must have filed a tax return for the debt you wish to discharge at least

two years before filing for bankruptcy.

You pass the "240-day rule." The income tax debt must have been assessed by the IRS at least

240 days before you file your bankruptcy petition, or must not have been assessed yet. (This time

limit may be extended if the IRS suspended collection activity because of an offer in compromise or a previous bankruptcy filing.)

The Effect of Federal Tax Liens

If your taxes qualify for discharge in a Chapter 7 bankruptcy case. your victory may be bittersweet. This is because prior recorded tax liens are not affected by your filing. A Chapter 7 bankruptcy will wipe out your personal obligation to pay the debt, and prevent the IRS from going after your bank account or wages, but any lien recorded before you file for bankruptcy remains. In effect. this means you'll have to pay off the lien in order to sell the property.