Does Declaring Bankruptcy Eliminate Tax Debt?

“…in this world nothing can be said to be certain, except death and taxes.”

— Benjamin Franklin

This quip of Franklin’s is a lasting reminder that Uncle Sam always takes his cut. It was true at the close of the American Revolution, and it remains true now. Not even filing for bankruptcy can help you avoid paying most taxes.

You said “most…”

Whether you can wipe out tax debts by filing for bankruptcy depends on the type of taxes you owe and the type of bankruptcy you file.

Chapter 7

If you are an individual who is eligible to file for bankruptcy under Chapter 7 of the bankruptcy code, you may be able to get past due federal income taxes forgiven. Other taxes, like state level taxes or payroll taxes cannot be discharged.

In order to have your federal income tax debt discharged, you must be able to show:

  • You did not commit fraud or willfully evade paying your taxes.
  • The debt is at least three years old.
  • You filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy.
  • The income tax debt was assessed by the IRS at least 240 days before you filed your bankruptcy petition, or was not assessed before you filed. This is known as the “240-day rule.”

Our firm’s experienced bankruptcy attorneys can help you determine if you meet these criteria, and if not, what other options are available to you.

Chapter 11 & Chapter 13

If you don’t qualify for a Chapter 7 bankruptcy, or you are filing on behalf of a business, whether your tax debt is dischargeable is a much more complicated question that can’t be easily summarized in a blog post. If this is the situation you are in, the Hanson & Payne team would be happy to meet with you and advise you.

Other Options

If you are struggling to pay off tax debt, and that is what is pushing you toward bankruptcy, there may be another path you can take.

The IRS is often willing to enter into a repayment plan with taxpayers that cannot afford to pay off all their tax debt in one fell swoop. If you think you can eventually pay off your taxes, this can be a great option. You may, however, still be on the hook for late fees and interest.

If you do not believe you will be able to pay off all of your tax debt, but you could pay off a significant chunk of it right now, or over time, you may want to make what is known as an offer in compromise. This is an agreement to pay a lower amount now instead of the full amount later. The IRS is open to this when it believes the amount you are offering is as much as it can reasonably expect to collect over time. To put it another way, the IRS fears you will not pay up in full, so it will take what it can get.

Get the help you need.

Bankruptcy law and tax law are both complicated. We recommend contacting an experienced bankruptcy law firm if you are even remotely considering filing for bankruptcy because of your tax debt.