Can You Discharge Tax Debt in Chapter 7?
In a Chapter 7 bankruptcy filing, you can discharge certain debts in exchange for the sale of non-exempt property. As a general rule, domestic support obligations, such as child support and spousal support, are not dischargeable, and student loan payments are only rarely dischargeable in cases of undue hardship. The common perception is that tax debts may not be discharged in Chapter 7, but this is not entirely true.
The Discharge of Tax Debts in Chapter 7
Certain types of tax obligations may not be discharged under any circumstances. These include taxes which a debtor is required to collect and submit to the taxing authority, such as excise or sales taxes and money withheld an employee’s pay for taxes or Social Security by such as FICA taxes) that was not in fact paid over.
Income taxes and the interest on them (but not tax penalties for failure to file a return or pay a tax) CAN be discharged providing all the following is true:
- The tax was not incurred as the result of fraud or of willful tax evasion—If the taxing authority can show any instance of intentional evasion or misrepresentation, the tax cannot be discharged.
- A tax return for the specific tax year or tax period was actually filed. Substitute returns that the IRS or a taxing authority prepares to estimate the tax due do not qualify.
- The tax return was timely filed, and the last due date to file the return was more than three years before you filed for bankruptcy. Note this is not the date the return was filed, but the date was last due. Thus, if due to extensions the return was due by October 30 but you filed on September 30, the three year look-back runs from October 30.
- If the return was filed late, it was filed more than two years before your bankruptcy filing.
- If the taxing authority issued an assessment of tax liability, that was more than 240 days (plus certain additional time for various reasons) prior to your bankruptcy filing.
Even if your personal liability for a tax is dischargeable, there may be tax liens filed that will survive a bankruptcy unless something is done about them. These liens attach to your property. More about them in a later blog post.
IRS CIRCULAR 230 DISCLOSURE: Pursuant to Treasury Regulations, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used or relied upon by you or any other person, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax advice addressed herein.
Contact Neuner & Ventura, LLP
We understand the stress, anxiety and confusion that can be associated with a potential bankruptcy filing. We offer a free initial consultation to every client. For an appointment, call Neuner & Ventura at (856) 596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another attorney. Evening and weekend appointments are available upon request.
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