Tax Debts in Bankruptcy:

Bankruptcy may be able to eliminate or reduce debts to the IRS or state taxes. The tests for whether taxes can be eliminated can be complicated, but this will attempt to provide a basic summary.

Anyone wishing to deal with tax liability would need to consult qualified counsel to examine their specific situation to determine what the best course is for them.

Bankruptcy usually cannot eliminate 941 tax debt or sales tax debt, though these can be paid through Chapter 13 with little or no interest and no additional penalties after the Chapter 13 is filed.

Chapter 13 can also pay income taxes usually without additional interest and without additional penalties after the case is filed, and depending on the analysis below the taxes might not have to be paid in full.

For regular income tax, three requirements must be met to eliminate the taxes in bankruptcy without paying them in full.

  1. The first requirement looks at when the tax return was due. Normally returns are due on April 15 of the following year, but if an extension was requested, the tax return is due when that extension expired. In order to eliminate taxes without having to pay them in full, the return must have been due three years before the bankruptcy is filed.
  2. The second requirement looks at when the taxes were assessed. The taxes must have been assessed by the IRS at least 240 days before the bankruptcy is filed. If an offer of compromise had been pending during that 240 days, 90 days is added to the 240, and the time the offer was pending is not counted toward that 240 days.
  3. The third requirement is the return must have actually been filed at least 2 years before the bankruptcy is filed.

In computing these time periods, if a prior bankruptcy was filed, the time the debtor was in a prior bankruptcy is not counted, and 90 days is added to the time computed.

Michael Barnett, Esq.
Michael Barnett, PA
506 N Armenia Ave.
Tampa, FL 33609-1703