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When are taxes dischargeable in bankruptcy?

On Behalf of | Jun 14, 2021 | Bankruptcy |

In most cases, there are some debts that cannot be discharged in bankruptcy. Those may include child support obligations, tax obligations and student loans.

However, there are cases where people may be able to have their taxes forgiven and discharged in bankruptcy. This usually requires that the person filing for bankruptcy is dealing with unreasonable hardships and can show that paying off that debt would be impossible or have a significant, and negative, impact on their life.

Taxes are high-priority debts

Remember, taxes are high-priority debts, because they are used to pay for all kinds of needs and services of the American people. As a result, anyone who goes into bankruptcy may need to pay those back, even if other debts are forgiven.

In Chapter 7 bankruptcy, it may be possible to get those taxes forgiven if the taxes:

  • Are income taxes based on commissions, wages or other income
  • Were determined using accurate tax returns

If your tax debt was due at least three years ago, then it may also be dischargeable in some cases. Additionally, you will need to show that you filed a tax return within two years of the bankruptcy petition.

The Internal Revenue Service has to assess the tax before you can file for bankruptcy and include it for discharge. This has to happen at least 240 days before you file for bankruptcy. This doesn’t always happen right away after you file your taxes, so you will need to determine when the IRS assessed the tax debt prior to filing for bankruptcy to be sure that you waited long enough.

Keep in mind that any fraudulent tax returns made will disqualify a person from getting the taxes discharged. For example, if the IRS finds that someone owes more debt because of submitting a fraudulent return, then that debt may not be discharged under most circumstances.

It’s difficult to discharge taxes, but it’s not impossible. This is something to discuss if you’re considering filing for bankruptcy, because if the taxes can be discharged, you could save yourself hundreds or thousands of dollars in the long term and become financially stable much sooner.