If you are facing serious financial difficulties, you may want to consider the option of filing for bankruptcy. The question of whether bankruptcy makes sense for you depends in part on the types of debt that you owe. If you owe substantial tax debt, for example, bankruptcy may not wipe out those debts. Taxpayers who file under Chapter 7 usually cannot include tax debts in their discharge, while taxpayers who file under Chapter 13 would need to arrange for a full repayment of their tax debts in their repayment plan. However, there are limited exceptions for people who file under Chapter 7. They may be able to include their tax debts in their discharge if they meet certain conditions.
Bankruptcy Discharges for Tax Debts
You can discharge only income tax debts that are at least three years old in a Chapter 7 bankruptcy. You must not have committed fraud by making false statements or misrepresentations on your tax return, and you must not have intentionally attempted to avoid paying your tax obligation. Moreover, you generally must have filed a tax return for the debt in question at least two years before you filed for bankruptcy. Some courts waive this requirement if you file a late return. This happens when you do not file a tax return within any permitted extension of time, causing the IRS to file a substitute return for you. In most situations, a late return will not count as a return and does not allow you to discharge the related tax debts.
Finally, you must satisfy a requirement known as the 240-day rule. This means that the debt was assessed at least 240 days before you filed for bankruptcy, or the IRS has not yet assessed it. Sometimes the clock is paused for the purposes of this rule if the IRS suspends its efforts to collect the tax debt. It might suspend collection efforts if it is negotiating an offer in compromise with the taxpayer or if the taxpayer filed for bankruptcy on a previous occasion.
Tax Liens in Bankruptcy
You cannot discharge any previously recorded tax liens in a bankruptcy, regardless of which chapter you file. This is true even if you meet the requirements above for getting your tax debts discharged. While you will not have a personal obligation to pay tax debt if you get it discharged under Chapter 7, liens related to that debt will remain on the property if they were recorded before you filed for bankruptcy. You will not face wage garnishment or levies from your bank accounts, but you will need to pay off the debt to the IRS before you can sell the property.