Can Tax Debt Be Discharged in Bankruptcy? What You Need to Know About Back Taxes
If you owe back taxes and are considering bankruptcy, one of your first questions may be:
Can my tax debt be written off in bankruptcy?
The answer is: sometimes.
Certain tax debts may be eligible for discharge in bankruptcy, while others must still be paid. Whether a particular tax debt qualifies depends on several factors, including the type of tax you owe, when the tax return was due, when the return was actually filed, when the tax was assessed, and the type of bankruptcy you file.
And if you have unfiled tax returns, getting those returns completed may be an important part of keeping your bankruptcy case moving forward.
Can Back Taxes Be Included in Bankruptcy?
Yes. Tax debt can be included in a bankruptcy case, but including tax debt in bankruptcy does not automatically mean the debt will be discharged.
Some tax debts may be treated as priority claims that must be paid. Other qualifying income tax debts may potentially be discharged.
The treatment can also be different from one tax year to another.
For example, someone who owes the IRS for several different years could potentially have one tax year treated differently from another based on when the return was due, when it was filed, when the tax was assessed, and other circumstances.
This is why simply knowing the total amount you owe the IRS isn't always enough when preparing for bankruptcy.
When Can Income Tax Debt Potentially Be Discharged?
There are several timing rules commonly considered when determining whether certain income tax debts may qualify for discharge.
The Three-Year Rule
Generally, the tax return associated with the debt must have been due, including applicable extensions, more than three years before the bankruptcy petition was filed.
The Two-Year Filing Rule
Late-filed tax returns can create additional complications.
Certain income tax debts associated with returns filed late and within the two years before the bankruptcy petition may not be dischargeable.
This is one reason the actual filing date of a delinquent return can matter—not simply the tax year printed on the return.
The 240-Day Rule
The date the tax was assessed can also matter.
Generally, certain taxes must have been assessed at least 240 days before the bankruptcy filing to satisfy this particular timing requirement.
Certain events can extend or suspend bankruptcy tax timing periods, so these dates should be reviewed carefully rather than estimated.
What Tax Debts May Not Be Discharged?
Bankruptcy does not eliminate every type of tax debt.
Depending on the circumstances, nondischargeable tax obligations can include certain recent income taxes, taxes associated with unfiled or certain late-filed returns, taxes involving fraudulent returns or willful tax evasion, and certain withholding or trust-fund taxes.
The bankruptcy chapter also matters.
For example, in a Chapter 13 case, certain priority tax claims generally must be paid through the bankruptcy plan.
Because dischargeability is a legal determination based on the facts of the individual bankruptcy case, your bankruptcy attorney should determine how your particular tax liabilities will be treated.
What If You Haven't Filed All of Your Tax Returns?
This is where bankruptcy tax compliance becomes especially important.
If you're considering bankruptcy and have several years of unfiled tax returns, don't assume those returns no longer matter simply because you're filing bankruptcy.
Missing required tax returns can create problems during the bankruptcy process.
Can Unfiled Tax Returns Delay or Affect a Bankruptcy Case?
Yes.
Unfiled tax returns can delay the bankruptcy process and, depending on the circumstances, can create more serious issues with the case.
Chapter 13 debtors are generally required to file required tax returns for tax periods ending during the four-year period before the bankruptcy petition. Failure to meet applicable tax-filing requirements can prevent confirmation of a Chapter 13 plan and, in certain circumstances, may result in the case being dismissed or converted.
Tax filing obligations also continue after bankruptcy is filed. Required returns that become due during an active bankruptcy generally still must be timely filed or properly extended.
That's why identifying missing tax years as early as possible is important.
Waiting until your attorney, trustee, court, or taxing authority identifies a missing return can create unnecessary complications when you're already trying to move your bankruptcy forward.
Why Filing Your Past-Due Returns Matters Even If You Can't Pay
Some taxpayers put off filing because they know they cannot afford the tax balance.
But filing the return and paying the entire tax liability are not the same thing.
Preparing a delinquent return establishes the income, deductions, credits, and resulting tax liability for that year.
That information can also give your bankruptcy attorney more accurate numbers when evaluating your financial situation and the treatment of tax debt in your bankruptcy case.
If the IRS has filed an estimated proof of claim based on missing returns in a Chapter 13 case, completing the delinquent returns can also help establish the actual tax liability.
Why the Exact Dates Matter
When tax debt and bankruptcy overlap, dates matter.
Depending on your situation, information that may need to be reviewed can include:
- Which tax years remain unfiled
- When each return was originally due
- Whether an extension was filed
- When each return was actually filed
- When the tax was assessed
- Whether amended returns are involved
- Whether prior bankruptcy or certain collection proceedings occurred
- The current balance associated with each tax year
This information helps create a clearer picture of your tax compliance history.
Your bankruptcy attorney can then evaluate how the tax debt may be treated under bankruptcy law.
Tax Preparation and Bankruptcy Legal Advice Are Different
Tax City Advisors assists clients with the tax compliance side of bankruptcy.
Our bankruptcy tax compliance services can include:
- Preparing delinquent federal and state income tax returns
- Preparing current-year tax returns
- Reconstructing tax returns when records are missing
- Reviewing IRS transcripts
- Preparing self-employed and small-business tax returns
- Helping identify outstanding filing years
- Providing bankruptcy tax compliance support for individuals and attorneys
Our role is to help get your tax filings accurate and current.
Your bankruptcy attorney determines how your tax debts will be treated in your bankruptcy case and whether particular debts qualify for discharge.
Have Back Taxes or Unfiled Returns and Considering Bankruptcy?
Don't wait until a missing tax return becomes another issue in your bankruptcy case.
If you're behind on your taxes, aren't sure which years need to be filed, or need prior-year returns prepared for your bankruptcy, Tax City Advisors can help you get the tax-compliance side organized and moving forward.
Get compliant. Move forward. Start fresh.
Schedule your Bankruptcy Tax Compliance consultation with Tax City Advisors:
Tax City Advisors provides tax preparation and tax compliance services and does not provide legal advice or determine whether a particular tax debt is dischargeable in bankruptcy. Bankruptcy laws and tax rules are fact-specific. Consult a qualified bankruptcy attorney regarding your individual bankruptcy case.
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