One of the main questions I am asked by my bankruptcy clients is, “can I file chapter 7 bankruptcy on my income taxes?” The answer is YES, but there are number of requirements before doing so. This article will attempt to shed some light on what those requirements are.
The first concern is that the taxes in question are based on income taxes and not some other form of tax. Meaning the debt in question must be either federal IRS or state or taxes based on gross receipts. Second, the return on which the taxes are due must be from at least three years ago. These due must be from at least three years before you plan to file your chapter 7 bankruptcy petition. This must also include any extensions that have been filed, which would be tacked on to the end of that three-year period. Plus, the return in question must have been filed at least two years prior. It’s also important to know that to avoid any objections in bankruptcy court by the taxing authority, the return must be executed, mailed, and be sufficiently completed to be considered an actual return for these purposes. Another requirement is that the taxes had been assessed at least 240 days ago. Meaning that the taxing authority in question must have assessed the debt against the person filing for bankruptcy at least 240 days prior to filing the bankruptcy petition, meaning that it has been recorded as a debt in the taxing authorities records at least 240 days prior to filing the bankruptcy petition. The final requirement for discharging income taxes under bankruptcy is that there was no fraud or willful evasion of said taxes. Essentially the return must not be fraudulent or frivolous and the filing party cannot be guilty of intentionally evading any laws.
It is also important for the bankruptcy petitioner to realize not all tax debt are dischargeable under chapter 7 bankruptcy, you cannot get rid of non-income tax related debts. The following is a brief overview of the types of taxes which are not dischargeable under chapter 7 bankruptcy. Tax liens which are also known as secured taxes and are attached to property such as your home cannot be discharged in a chapter 7 bankruptcy. Essentially you will not be liable for payment of the taxes, but if the taxing authority placed a lien on your property to secure the debt, this will not remove said lien. Your bankruptcy attorney could file a motion to avoid liens, but liens placed on property, just as if you had a lawsuit in a lien was filed against your property, is not automatically removed through a bankruptcy proceeding. Another form of tax, that is non-dischargeable are recent property taxes. If you have been assessed property taxes before you file bankruptcy, that tax is non-dischargeable. Although this only applies to property taxes that were payable within one year of your bankruptcy filing. Another form of tax which is non-dischargeable are taxes that a third party is required to collect or withhold. These are what are sometimes called “trust fund” taxes such as FICA, Medicare, and income taxes that have been withheld from your employer. There are also several other forms of taxes that are non-dischargeable such as excise taxes custom duties, non-punitive tax penalties, and taxes such as that. Finally refunds that were improper or credits relating to non-dischargeable taxes will not fall under the rules of chapter 7 bankruptcy.
In conclusion, you can discharge income tax debt in a chapter 7 bankruptcy proceeding if all the requirements have been met. This is why it is always important that you seek the representation of an experienced bankruptcy attorney in your area to handle such matters.