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Income Tax Issues in Bankruptcy

November 12, 2013

Bankruptcy law and tax law are two separate areas of law but the two often intersect.  In order to successfully complete a bankruptcy case you must often be in compliance with tax code provisions and tax issues can be resolved with the bankruptcy process. Find some examples below of common tax issues in a chapter 7 and chapter 13 bankruptcy cases.

Is Tax Debt Dischargeable in Bankruptcy

As a general rule tax debt is not dischargeable in bankruptcy. Sometimes old tax debt can be discharged.  The analysis for discharging tax debt is complicated and usually requires an attorney to review.  There are five rules for discharging tax debt. The debt must meet all five of the rules to be dischargeable. Those rules are:

  • The due date for filing a tax return is at least three years ago.
  • The tax return was filed at least two years ago.
  • The tax assessment is at least 240 days old.
  • The tax return was not fraudulent.
  • The taxpayer is not guilty of tax evasion.

 If you believe that your debt may qualify it’s a good idea to provide your attorney your tax transcript for the year you owe. It will usually contain the information you need.

Tax Debt in Chapter 13

In order to get your chapter 13 case confirmed the past 4 years tax returns must be filed with the IRS.  While the bankruptcy code requires the past 4 years it is usually a good idea to file all necessary returns. If you have not filed the IRS may show that you owe money. If that is the case you would want to make sure that the debt is paid in the chapter 13 plan.

Any tax debt that you owe can be classified three different ways. Normally tax debt is entitled to a priority. This means that the debt is not dischargeable and needs to be paid out over the life of the chapter 13 plan. This is true for most IRS debt and thus a chapter 13 case can be a good way to pay off your taxes. If there is a tax lien in place then the IRS Debt is secured. This means that the IRS has a security interest in all of your property.  You will then have to pay the IRS up to the value of all your property, which you will have listed on schedule B of your petition. Lastly IRS debt can be general unsecured debt.  This means that the IRS collects only a pro rata share along with all your other unsecured debt. Then, at the end of the case some or all of the IRS debt may be discharged.


If you have mounting tax issues contact the experienced attorney’s at Fears Nachawati 1.866.705.7584


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