Federal or state income taxes can only be discharged in Chapter 7, Chapter 13 or Chapter 11 bankruptcy if all of the following conditions are met:
The taxes must be exclusively for income taxes. In bankruptcy, taxes such as payroll taxes, trust fund taxes, sales tax, and fraud taxes cannot be discharged.
You have not engaged in deceit or intentional tax evasion. If you filed a false or fraudulent tax return or wilfully attempted to evade paying taxes, you cannot eliminate your tax debt. For instance, if you falsely underreported your income, you cannot erase the debt after being discovered.
The debt must be at least three years old as of its due date. In order to discharge tax debt, the bankruptcy must be submitted three years after the tax's original due date. For instance, if a tax liability resulted from a 2005 tax return, the due date for this tax obligation would be April 15, 2006. In this scenario, you would need to wait until April 15, 2009 to file for bankruptcy in order to be eligible for IRS tax debt discharge. Frequently, you must be mindful of the appropriate waiting period to ensure that the tax debt will be eliminated.
You were required to file a tax return for that year two years prior to filing for bankruptcy. At least two years prior to filing for bankruptcy, you must have submitted a tax return for the IRS or State debt you wish to discharge. Thus, even if the debt is older than three years, if the return was filed late and two years have not elapsed, the Internal Revenue Service or State tax debt cannot be eliminated.
You must comply with the 240-day norm. At least 240 days must have passed since the IRS assessed your income tax debt, or the debt must not have been assessed yet. The IRS can extend this deadline if collection efforts have been suspended due to a compromise offer or a prior bankruptcy filing.
When the IRS has already filed a tax lien against a client, the client must be aware that distinct rules apply. In some instances, a bankruptcy may release you from personal liability for a tax debt, but it will not release a properly filed tax lien. After bankruptcy, the IRS cannot pursue you personally for the debt, but the lien will remain on any assets, so you will not be able to sell these assets - including your property - without satisfying the outstanding lien. Depending on the lien and when it was lodged, there may be additional options to contest the lien's validity.""
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