Will bankruptcy discharge my past-due income tax debt?

Whether unpaid federal income taxes will be wiped out (discharged) in a bankruptcy filing depends on which chapter is used: Chapter 7 or Chapter 13.

A Chapter 7 debtor can wipe out delinquent federal income taxes if all the following are met:

  1. The IRS had not filed a prior federal tax lien on the assets you own (if they have, the lien survives bankruptcy, which means that the government may still seize property to collect the discharged tax debts); 
  2. You didn’t file fraudulently or try to evade paying your taxes; 
  3. The delinquent taxes are more than three years old; and,
  4. Income tax deficiencies that were assessed on prior returns were assessed by the IRS at least 240 days prior to the filing of your bankruptcy. 

In a Chapter 13 case, the debtor will have to pay the IRS as part of a Chapter 13 three-or-five year repayment plan. Not staying current on post-petition taxes, however, will put that plan at risk.

Prior to the Sec. 341 meeting of the creditors, a debtor was required to file copies of tax returns or transcript (including unfiled tax returns and any amendments while a case is open) with the bankruptcy trustee, or any creditor who requests it. If a debtor does not provide the requested tax documents, they may risk an automatic dismissal of their case.

If a federal Notice of Tax Lien has been recorded before filing bankruptcy, it is highly recommended that the debtor seek the advice of an experienced bankruptcy attorney as discharging taxes is far more complicated.