Do you have past federal income tax debt? Bankruptcy might help

On Behalf of | Apr 25, 2023 | Bankruptcy

Income tax season has ended for another year, leaving some people in Nutley with significant tax debt that they have no means of paying back, especially if they are already in arrears on what they owe from prior years.

If you find yourself in this situation, you might want to file for bankruptcy as an option, but you worry that your tax debts will not be discharged.

This belief is not entirely true. While some types of tax debt cannot be discharged through bankruptcy, sometimes federal income tax debt can be discharged via the Chapter 7 bankruptcy process.

Discharging tax debt through Chapter 7 bankruptcy

Federal income tax debt can be discharged via Chapter 7 bankruptcy under the following circumstances.

First, you cannot have engaged in tax fraud or tax evasion. Second, your tax debt must have originated three years or more prior to your Chapter 7 filing date.

Third, you cannot have missed filing any tax returns for the debt you are seeking to have discharged for two years or more prior to your Chapter 7 filing date. In most courts, filing late returns is seen in the same light as not filing a return at all.

Fourth, your tax debt must have been assessed by the Internal Revenue Service (IRS) 240 days or more prior to your Chapter 7 filing date, or it must not have been assessed by the IRS at all. There might be other requirements as well, depending on your jurisdiction.

Tax liens and Chapter 7 bankruptcy

Note that you cannot wipe out a federal tax lien on your property through Chapter 7 bankruptcy. You might qualify to have your income tax debt discharged, but you will still have to pay off the tax lien if you want to sell your property. However, once you file for Chapter 7, the IRS must cease collection efforts, even though the lien remains.

Federal income tax might be discharged via bankruptcy

While this post focused on Chapter 7 bankruptcy, note that federal income tax debt might also be addressed if you file for Chapter 13 bankruptcy. In the end, you might be stuck paying some tax debts, even if you file for bankruptcy. However, federal income tax debt might be discharged through the Chapter 7 bankruptcy process.

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