Does bankruptcy relieve your tax obligations? It's a common question debtors ask this time of the year.
Whether you owe taxes after bankruptcy will depend on a variety of factors, including the type of bankruptcy case you filed and the type of tax obligation at issue.
In some circumstances, bankruptcy law permits the discharge of tax debt. Generally, it's more feasible in Chapter 7 than in Chapter 13 bankruptcy.
Dischargeable Tax Debt
Federal income taxes in Chapter 7 might be dischargeable if the debtor meets all of the following conditions:
- The discharge is for income taxes;
- The debtor filed a legitimate tax return;
- The tax liability is at least three years old;
- The debtor is eligible under the 240-day rule (that is, the IRS assessed the tax debt at least 240 days before the debtor filed for bankruptcy, or the IRS has not yet assessed the tax debt);
- The debtor did not commit willful tax evasion;
- The debtor did not commit tax fraud.
Non-Dischargeable Tax Debt
The following types of tax debt are generally not dischargeable in Chapter 7 bankruptcy:
- Federal tax liens;
- Tax penalties from tax debt;
- Tax debts from unfiled tax returns; and
- Trust fund taxes or withholding taxes withheld from an employee's paycheck by the employer (e.g. payroll taxes).
Regardless of whether or not your tax debt is dischargeable, if you have an open bankruptcy, you must submit copies of your 2013 state and federal income tax returns -- even if you're not receiving a refund. Any refunds you do receive must be sent to the trustee for review. Failure to follow the rules regarding bankruptcy and taxes may very possibly result in an objection to your bankruptcy discharge.
A Phoenix bankruptcy attorney can guide you through the process of figuring out your tax obligations. Even if your tax debt is not dischargeable, your attorney can help you explore other financing options, such as flexible payment plans with the IRS.
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