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May I discharge my tax debts in bankruptcy?

One of the primary benefits of filing for bankruptcy is the ability to discharge debts at the end of the process. Discharge, in any type of bankruptcy, is only granted if a bankruptcy case is successfully completed, and even then, the right to discharge is not absolute. There are certain exceptions regarding the types of debt which may be discharged.                        

One form of debt which may or may not be discharged in bankruptcy is tax debt. Discharging tax debts in bankruptcy is possible, but it depends on the type of tax debt. Some tax debts are classified as non-dischargeable, while others are classified as dischargeable. Among the forms of tax debts which are non-dischargeable, some have priority over others. 

Priority tax debts include:

  • Taxes on returns where the due date is within three years of the bankruptcy filing date
  • Taxes assessed within 240 days of the bankruptcy filing date
  • Taxes assessed against trust funds, regardless of the age
  • Taxes that have not been assessed, but which are still assessable

Non-priority tax debts include:

  • Taxes on returns which have not been filed
  • Taxes on returns filed late within 2 years of the bankruptcy filing date
  • Taxes on fraudulent returns, as well as taxes for years where the taxpayer willfully attempted to evade or defeat taxes that are due

Tax debts which are not classified as either priority/non-priority non-dischargeable are dischargeable in bankruptcy. The difference between priority and non-priority is that dischargeable tax debts classified as non-priority would only be paid off under a bankruptcy plan after priority tax debts are paid off.

In our next post, we’ll continue looking at this issue and comment on the importance of working with an experienced advocate in the bankruptcy process.

Source: Internal Revenue Service, IRSNationwide Tax Forum, 2013. 

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