Bankruptcy and Taxes


Taxes play an important part in bankruptcy, both before and during the bankruptcy proceedings. Many debtors want to know if debts they owe to the IRS will remain with them once the bankruptcy is completed or whether these debts can be discharged along with other debts through the bankruptcy. Discharges are possible, but it can depend on a number of factors.

Discharge of Tax Debt

One question that often comes up involves whether the debtor can get a discharge of tax debt obligations. Whether a tax debt can be discharged depends on many different factors including the type of tax involves, how old the tax debt is, whether the debtor filed a tax return, and the type of bankruptcy being pursued.

Tax Debt and Chapter 7 Bankruptcy

In Chapter 7 bankruptcy proceedings, federal tax debt may be discharged if the debtor meets the following:

  1. The discharge being requested is for income taxes only. Payroll taxes and fraud penalties are not considered eligible for discharge;
  2. The debtor filed a tax return for the relevant tax year at least two years prior to filing for Chapter 7 bankruptcy;
  3. The tax liability is at least three years old, meaning it is from a tax return that was due at least three years before the bankruptcy case is filed;
  4. The taxes have been assessed by the IRS. Under the IRS Code, the IRS must have assessed the tax debt at least 240 days prior to the date that the debtor filed for bankruptcy. If the IRS happened to suspend collection during negotiation, the date may be extended;
  5. The debtor has not committed willful tax evasion. For example, if the debtor changed their Social Security number, name or spelling of his or her name, has repeatedly failed to pay taxes, has filed an incomplete or blank return, or has willfully hidden money from a bank account, these actions could lead a court to concluded that the debtor willfully evaded taxes;
  6. The debtor did not commit tax fraud.
  7. If the debtor meets all of the above requirements, the tax debt could be discharged via Chapter 7 bankruptcy.

Federal Tax Lien

Even if the tax debt can be discharged through Chapter 7 bankruptcy, however, a federal tax lien filed before the bankruptcy case was filed, can remain in effect, even after discharge. If a lien is filed before bankruptcy, the debtor may have to clear the title by paying off the lien if he or she wants to sell the property in the future.

Chapter 13 and Tax Debt

Different rules apply for discharging tax debt if the debtor has filed Chapter 13 bankruptcy. Chapter 13 bankruptcy is also known as the reorganization bankruptcy, in the debtor works with the bankruptcy trustee to develop a debt repayment plan. The repayment plan will describe the creditors to be repaid and determine the amount of debtor’s monthly plan payments.

Certain debts are considered “priority debts,” meaning they must be paid back in full during the repayment plan. Priority debts include recent income tax debt, child support and alimony.

Older tax debts are often considered “nonpriority” unsecured debts. Unsecured debts may or may not be paid off in full through the plan. Any nonpriority debts that are not paid off in full at the end of the repayment plan period will be discharged at the end of the case.

Non-dischargeable Debts

Just like some debts must be paid off no matter what, certain tax debts cannot be discharged in a bankruptcy case. For example:

  1. Income and social security taxes withheld from an employee’s paycheck by a debtor who is the employer are not dischargeable. These taxes are considered “trust fund taxes” because the debtor is essentially holding that money “in trust” for the federal government;
  2. Excise taxes paid on the sale, consumption or use on certain products, such as gasoline, cigarettes and alcohol;
  3. Estate taxes regarding transferring property from the estate of someone who is deceased to the deceased’s heirs; and
  4. Penalties assessed on tax fraud.


An experienced Texas bankruptcy lawyer can help you with any questions concerning whether your taxes can be discharged in a bankruptcy case. Call the Law Office of Marilyn D. Garner NOW at (817) 505-1499 for a free consultation to discuss how bankruptcy may help you.

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