Taxes in Bankruptcy

Will my tax debt be wiped out in a bankruptcy?  For many, that's a huge question.  It's also a question that a lot of professionals, bankruptcy attorneys included, don't have the answer to.  In most cases, the answer is "No."  Taxes are not discharged in a bankruptcy.  That's because the same people who wrote the Bankruptcy Code, Congress, are the same people who wrote the Internal Revenue Code and the government takes care of itself.  Letting people discharge taxes in bankruptcy would seriously hamper the government's ability to do business.

Tax debt CAN be discharged if all these conditions are met:
1.  The taxes are income taxes. Other types of tax, such as payroll taxes or the "personal liability assessment" for officers and directors of a company that didn't pay over payroll taxes, tax penalties and the like are not dischargeable, ever.
2.  You filed a return for the period in question.  If you've been delaying filing a return, the taxes can't be discharged regardless of how old they are.
3.  The taxes are at least three years past due.  Since income taxes are not due until April 15 of the year following the calendar year for which the tax applies, this means three years after April 15 for the prior year.
4.  You didn't commit fraud, such as wilfully evading paying, using a false social security number, etc.
5.  You pass the "240-day" rule, which says the IRS must have assessed the tax more than 240 days before you file, or it hasn't yet assessed the tax.  If you fall between those two deadlines, they can't be discharged.

WARNING:  Even if you are able to discharge the taxes, if the IRS filed a tax lien against any property you own, that lien, just like other liens, such as mortgages or judgments, passes through bankruptcy unaffected and can still be enforced against the property.

If you are filing bankruptcy because of tax debt (this includes state taxes as well as federal), be sure you talk to a knowledgeable tax and bankruptcy professional before filing.