The Impact Of Bankruptcy On Income Tax Debt


The Kentucky Bankruptcy Blog has posted an article that discusses how some debts aren’t dischargeable under bankruptcy, except under special circumstances. For example, student loans, income tax debt, and child support payments are common types of debt that cannot be easily discharged.

The rules surrounding the discharging of income tax debt can be very tricky. How much of the debt that can be discharged largely depends on what type of bankruptcy has been filed for. Chapter 7 and Chapter 13 each have different stipulations.

Ms. Julie O’Bryan, author of the blog, says that:

An income tax debt arises from a tax return for a particular tax year. In general, an income tax debt for a particular tax year may be discharged if the following criteria are met:

The due date for filing the tax return was at least three years prior to the bankruptcy filing date. This due date includes any extensions.
The tax return was filed at least two years prior to the bankruptcy filing. This date is the time the return was actually filed with the IRS.
A tax assessment was made at least 240 days prior to the bankruptcy filing. The tax assessment is usually measured from the IRS proposed assessment sent to the taxpayer.
The tax return was not fraudulent, and the taxpayer has not attempted to evade the tax laws. Dishonest taxpayers do not receive the benefits of the bankruptcy laws.

Any taxes that don’t fall under the guidelines listed above will not be discharged in bankruptcy, including unfiled tax returns. When an income tax debt becomes discharged, any corresponding tax penalty is also discharged too. However, in a Chapter 7 bankruptcy filing, a tax penalty is discharged as long as it and the corresponding tax debt are less than 3 years old. In a Chapter 13 filing, all unsecured tax penalties are treated as any other debt during the time indicated in the bankruptcy repayment plan. The Chapter 13 prevents any new tax penalties from forming.

The federal bankruptcy laws contain specific provisions for discharging income tax debt. Bankruptcy can provide you with time to repay your obligation, without the threat of IRS seizure or garnishment; or, in some circumstances, can permanently discharge your tax debt.

Before you decide to file for bankruptcy, it’s imperative that you consult with an attorney. If you have further questions or concerns about bankruptcy, feel free to contact us through our website or by calling 205-879-2447.

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