Can You File Bankruptcy on Federal Taxes Owed?

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Filing bankruptcy is a way to eliminate most of your outstanding debt, as long as you qualify. Certain debts are considered non-dischargeable by the U.S. Bankruptcy Court, meaning you cannot remove your obligation to pay them. Tax debt is generally classified as non-dischargeable debt. However, in certain circumstances you can discharge some federal taxes by filing bankruptcy.

Type of Tax Debt

  • The first qualification for the discharge of federal tax debt is that the debt is for income taxes. Payroll taxes and other non-income taxes are not dischargeable under any circumstance. Additionally, you must have filed a valid income tax return for the year in question in order to render that tax debt possibly dischargeable.

Age of Tax Debt

  • You cannot have recent income taxes discharged. Bankruptcy law states that for tax debt to be discharged, it must be at least three years old. The time period for tax debt runs from the day the tax return was originally due until the day you filed your bankruptcy petition. For most tax years, tax returns are due on April 15, so even if you filed your return in February of the year in question the clock doesn't begin running until April of that same year.

Fraud

  • If you committed fraud or willful tax evasion when you filed your tax return, a bankruptcy discharge will not clear your back taxes. Examples of this include using a false Social Security number on your return, changing your name or the spelling of your name, filing a purposely incomplete tax return or hiding cash deposits from the Internal Revenue Service.

240-Day Rule

  • In addition to the three-year rule, taxes must have been assessed by the IRS at least 240 days before you file bankruptcy in order for them to be considered for discharge.

IRS Lien

  • While in the above situations an old tax debt may be considered dischargeable, federal tax liens are never dischargeable. If the IRS attached a lien to your property before you filed bankruptcy, then the lien will survive your bankruptcy case and still be enforceable after discharge. Essentially, if you ever wish to sell the attached property, you must first pay off the lien.

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