When Can You Discharge Tax Debts in Chapter 7?

Can You Lose Individual Retirement Account Assets in a Bankruptcy?

discharge tax debts in chapter 7In a Chapter 7 bankruptcy filing, you can typically discharge certain debts in exchange of allowing some of your assets to be placed in the bankruptcy estate, where they may be sold to satisfy creditors. Among the debts typically identified as non-dischargeable are family law (child support and alimony) arrearages, student loan payments and tax obligations.

It’s not entirely accurate, though, to say that tax debts can never be permanently wiped out in Chapter 7. It’s difficult, but not impossible to accomplish that objective.

When Tax Debts Can Be Discharged

First, it’s important to understand that there are some types of tax bills that cannot be discharged under any condition. Payroll taxes, such as FICA, cannot be discharged. In addition, property taxes incurred before a bankruptcy filing are not dischargeable.

It’s also important to recognize that discharge affects only the duty to pay the tax. It will not have any effect on a tax lien.

There are five requirements that must be met to qualify for discharge of a tax obligation:

  • You must show that the debt was not incurred because of fraud or willful tax evasion
  • The tax must be an income-based tax
  • You can only discharge taxes from a return that was due at least three years before your Chapter 7 filing
  • You must have filed the tax return at least two years before your bankruptcy petition—you can never discharge tax arrearages from a substitute return prepared by the IRS. The return must have been properly filed for at least two years before your bankruptcy petition.
  • The tax liability must have been assessed at least 240 days before your bankruptcy filing

Contact Heath, TX Bankruptcy Attorney Carrie Weir

I offer a free initial consultation to all potential bankruptcy clients. Contact my office by e-mail or call me at 972-772-3083 for a private meeting. With offices in Rockwall, Texas, I represent clients in Heath, Greenville, Lavon, Wylie, Mesquite and Rowlett.

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