Discharging Income Taxes in Consumer Bankruptcy

In addition to revolving and secured debts, I owe quite a bit in back taxes. Is this amount dischargeable in consumer bankruptcy?

With all the stress associated with substantial outstanding debts, dealing with the IRS on top of it all can bring about significant added anxiety and frustration. Fortunately, for some debtors, it may be possible to discharge a portion of outstanding tax liabilities – provided certain conditions are met.

First, tax debts eligible for discharge must be income-based. In other words, only taxes incurred as a result of regular employment income or gross receipts are dischargeable in consumer bankruptcy. In addition, the following requirements are also in place concerning the dischargeability of income tax debt in a consumer bankruptcy action:

  • An outstanding tax debt cannot be the result of a willful tax evasion or intentional misconduct. One important caveat, however, is that the court must find (for joint filers) that both conspired to intentionally evade tax liability – and this requirement may be waived for any spouse who truly was not aware of the other’s criminal behavior.
  • The liability must be at least two years old – meaning, the tax return must have been filed at least two years prior to the bankruptcy filing. As well, the return must have been due at least three years ago.
  • The taxing authority – state or federal – must have entered the tax debt against the bankruptcy filer at least 240 days prior to filing for relief in a U.S. Bankruptcy Court.

By and large, the requirements surrounding the discharge of income tax liability involve the age of the debt and whether the debtor had an opportunity to try and repay the outstanding tax bill. Keep in mind, as well, the following types of tax are not dischargeable under any circumstances: tax liens, property taxes, taxes an employer is required to withhold (e.g., Medicare, FICA), or non-punitive tax penalties.

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