Discharging Taxes in Bankruptcy

They say that nothing in life is certain, except death and taxes. Most people assume that personal income taxes cannot be discharged in a bankruptcy. The general rule with discharging any debt in a bankruptcy is that debt is dischargeable unless it falls under one of the many exceptions listed in the Bankruptcy Code.

Taxes are the first exception to discharge listed in the Bankruptcy Code. This should not come as a surprise when Congress drafts both the bankruptcy and tax laws, and are not inclined to eliminate debt owed to the U.S. government. However, even this exception has exceptions (confused yet?) allowing some income tax debt to be eliminated in a bankruptcy filing.

Personal income taxes are dischargeable if they meet the following guidelines:

  1. More than 3 years have passed since the tax return was due;
  2. More than 2 years have passed since the tax return was filed;
  3. More than 240 days have passed since the taxes were assessed; 
  4. The tax returns were filed on time (or within an extension period, if an extension was obtained)

Of course, if there was any fraud or willful evasion involved the taxes owed will not be dischargeable.

How does this work in practice?

In a Chapter 7 case, any dischargeable tax debt will be eliminated when the discharge order is issued. In a Chapter 13 case, the non-dischargeable portion of the tax debt will remain as a priority claim and must be paid in full in a Chapter 13 plan. However, the portion that is dischargeable will be paid in the same class as any credit cards or personal loans (at a percentage or in full, depending on the plan). Of course, if there’s any question over whether some tax debt is dischargeable, one can bring an adversary proceeding (a lawsuit within a bankruptcy case) to obtain a determination from a bankruptcy judge.

Both the IRS and New York State are quick to collect and will garnish wages and put liens on your property. Interest will continue to accrue on the balances until they are paid. If you owe a significant amount of taxes, give us a call so we can review what portion may be dischargeable and craft a plan to eliminate this debt.

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Zimmelman Law PLLC

With over ten years of experience, Matthew D. Zimmelman, Esq. has helped thousands become debt-free and saved countless New Yorkers from losing their homes in foreclosure. Whether you are an individual or a small business, looking to file bankruptcy or looking to eliminate your debt without filing bankruptcy, we are here to help you get a fresh start.
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