A debtor can file bankruptcy and have taxes owed to the IRS discharged. However, the laws on discharging taxes through bankruptcy specify that you must file Chapter 7 bankruptcy, not Chapter 13, in order for the tax debt to qualify for a discharge. The law also has several specific time requirements for a tax debt to be considered dischargeable in bankruptcy. It also makes clear that you can’t discharge taxes on a fraudulent return or if you are guilty of tax evasion. Payroll taxes also do not qualify for a discharge, although most individuals who do not own businesses that employ others will likely not owe payroll taxes.
Chapter 13 bankruptcy differs from Chapter 7 because under Chapter 13 you set up repayment plans and schedules with your creditors. It’s useful for people who can’t keep up with their monthly payments and want to restructure payments with their creditors to catch up and keep their credit reports in good standing. Chapter 7 allows you to completely wipe out debt without repaying it, although the law does prohibit certain types of debts from being discharged, such as a secured loan on a car that you plan to keep. If you want to keep the car, you can’t discharge the loan. So if you’re filing Chapter 13 bankruptcy, you’ll set up a repayment plan for your tax debt rather than having it discharged. If you want to attempt to discharge the debt completely, you’ll want to file Chapter 7.
While you can discharge some tax debt in Chapter 7 bankruptcy, your debt must meet certain requirements. The tax return you want to discharge must have a due date of at least 3 years before the bankruptcy. Additionally, it must have been filed at least 2 years prior. So it’s possible to have a tax debt discharged that was due 3 years ago even if you filed the return a year later. Another important rule that further defines the eligibility of a tax debt for bankruptcy discharge is that the IRS must have assessed the amount owed within the last 240 days. This means that within the last 240 days, or 9 months, the IRS must have calculated what you owe and informed you of the amount.
You also can’t attempt anything illegal by filing to have your tax debts discharged. If the return you filed contained fraudulent information, the government will not allow you to discharge that tax debt. You also can’t be committing tax evasion on the taxes you want to discharge.
If you want to get taxes you owe to the IRS discharged in Chapter 7, remember that timing is key. Don’t try to file too early. Count back to when the return was actually due, and keep in mind that returns are always due in April. So if you’re attempting to discharge a tax debt from 2009, you’ll have to wait until the middle of April 2013 before filing. Make sure that you know the exact dates because filing even one day too early can make your debt non-dischargeable under the law.