Bankruptcy and Taxes

Much to the surprise of many, income tax debt is dischargeable in bankruptcy. The catch is that the taxes must be old. They must have last become due more than three years before filing bankruptcy and the tax return must have been filed by the debtor (not IRS) for more than two years at the time that the bankruptcy is filed.

There are other provisions and exceptions that must be considered, but generally speaking if taxes are filed timely, if there is no fraud, if there is no offer in compromise and if there is no intervening bankruptcy, then these time periods are normally applicable.

So, for the tax debtor, the bankruptcy procedure is a balancing act. The debtor must balance the running of the time periods against the IRS collection procedures, the IRS federal tax lien, collection procedures from other creditors and, when relevant, he must balance the discharge against the means test and his current and future income.

Other types of taxes are dischargeable, also.

However, the trust fund portion of employment taxes is never dischargeable, so the bankruptcy of a business with employment taxes (or the bankruptcy of an individual who is responsible for the trust fund portion of those taxes) must be directed toward the payment of those taxes.

Charles Chesnutt