Are There Any Circumstances Where Tax Debts May Be Permanently Discharged in Bankruptcy? If So, What Must Happen?
When you are struggling to meet your financial needs, whether as the result of a divorce, the loss of a job, challenges with your small business, health issues or other concerns, one of the last obligations typically paid are your tax bills. If you have little or no prospect that your finances will turn around, you may be considering filing for protection under Chapter 7. Are there any circumstances where unpaid taxes may be discharged through bankruptcy? If so, what criteria must be met to allow discharge?
You Can Discharge Tax Debt—In Limited Circumstances
There’s a common misperception that tax debts cannot be discharged. Some can, but the process can be complex.
First, let’s look at the types of tax obligations that are generally considered non-dischargeable:
- Real property taxes—If you have property taxes that have been assessed before your bankruptcy filing, they cannot be discharged in bankruptcy. There’s a bit of a catch, though. You can discharge your personal liability for taxes that were payable without penalty more than one year before your bankruptcy petition. However, when such taxes are more than a year in arrears, most counties in Texas will secure payment with a tax lien. A bankruptcy filing has no impact on the validity or enforcement of a lien.
- Any type of tax lien—If a revenue authority has executed a valid lien to secure payment of past-due taxes, it will remain in force, regardless of whether you file for Chapter 7 protection.
- Employment taxes, such as Medicare, FICA and income taxes that should have been withheld from your pay
- Excise taxes and customs duties
- Erroneous tax refunds or credits related to non-dischargeable taxes
When Can Income Taxes Be Discharged?
As a general rule, you may only seek to permanently discharge tax obligations in Chapter 7 if:
- The taxes were assessed based on your income
- The taxes you seek to discharge were due at least three years ago—the date of your bankruptcy filing must be at least three years after the final filing date from three years ago, typically October 15/
- You filed the return at least two years before you filed your bankruptcy petition
- The taxes were assessed at least 240 days before the filing of your bankruptcy petition
- There is no evidence of fraud or willful evasion in the failure to timely file your tax returns
Contact the Experienced Bankruptcy Law Attorneys at Bailey & Galyen
At the law office of Bailey & Galyen, we offer a free initial consultation to anyone who is considering filing a Chapter 7 bankruptcy petition. To speak with a knowledgeable bankruptcy lawyer, contact us by e-mail or 844-402-2992 call our offices at one of the convenient locations listed below. We will take your call 24 hours a day, seven days a week.