Owe TaxesCan I discharge taxes in bankruptcy?

Contrary to popular belief, taxes are dischargeable in bankruptcy.

In order to discharge taxes in bankruptcy have to pass five tests.

The big three are as follows:

  1. The tax return has to be filed more than two years ago. This means that “late filed” returns can keep you from being able to discharge the tax even if you meet all the other qualifications.
  2. The taxes have to be older than three years old as measured from the last due date.

Example:  tax year 2014 – can you discharge it?  The 2014 taxes were due on April 15, 2015.  We need to be beyond 3 years from this date to discharge the tax.  Three years from April 15, 2015 is April 16, 2018.  So, assuming that the taxes were filed on time, you should pass this test.

  1. The tax has to be assessed for more than 240 days. This is not generally a problem, but can be. We generally get an IRS transcript to be sure of this date.

There are other tests as well

This is a complicated area but the short answer is:

YES, you can discharge taxes in bankruptcy if you qualify.

And even if you can’t discharge the taxes totally, you can actually pay them a lot more inexpensively in a chapter 13.

In Chapter 13, penalties are considered unsecured general nonpriority debts like credit cards and medical bills. Thus, they are often paid off at pennies on the dollar.

And, although taxes are considered priority debts, they still don’t get paid any interest.

Compare this with an IRS payment plan.  In the IRS payment plan, you have to pay all the penalties and you also pay interest on the unpaid balance owed on your taxes.

For these reasons, it is much less expensive to pay your tax debt in a chapter 13.

If you have taxes debt along with all of your other debt, then you definitely should consult a board certified specialist to review your options with you.

Bankruptcy can be a very effective tool to deal with all of your creditors, including the IRS.