Filing for bankruptcy can help you manage outstanding federal income taxes that you owe. For instance, you might be able to eliminate IRS taxes, interest, and penalties if they’re old enough, and you meet certain other requirements. For IRS taxes that you can’t get rid of in bankruptcy, you can use bankruptcy to pay the outstanding balance you owe over three to five years.
Chapter 7 bankruptcy discharges (forgives) many debts without requiring you to pay into a repayment plan (if you qualify by passing the means test)—but not all of them. In the case of federal income taxes, if you meet requirements, older tax debts can be discharged. By contrast, new unpaid taxes are nondischargeable.
Applying the rules to determine whether your IRS taxes will be discharged in bankruptcy can be a bit challenging, to say the least. Here are the basics that you’ll need to know:
Example. Suppose that you plan to file for bankruptcy on September 1, 2017. The three prior tax years are 2016, 2015, and 2014. The taxes that you owe for those years won’t be dischargeable.
But what about the taxes you owe for 2013? Your tax return for 2013 was due April 15, 2014, and, if you had filed your return by that date, your taxes might be eligible for discharge. If, however, you filed for an extension with a new deadline of October 15, 2014, a bankruptcy case filed on September 1, 2017, won’t discharge the 2013 income taxes because the taxes were due less than three years before that date.
Example. Suppose that the IRS filed a 2012 return for you on April 1, 2014. You filed your own 2012 return on June 1, 2015. You’ll meet the two-year rule if you file your bankruptcy case after June 1, 2015.
Please be aware that in a few jurisdictions, the courts have concluded that once the IRS files a substitute return for you, you cannot remedy the situation by filing your return. In those jurisdictions, the taxes due on that return will never be dischargeable. A consumer bankruptcy attorney can help you determine if this is the rule the judge would apply in the court you would file your bankruptcy case.
Discharging IRS taxes you owe in bankruptcy can be quite technical. You could lose the right to discharge certain taxes if you make a mistake in your calculations, so it’s always advisable to consult with an experienced bankruptcy attorney, CPA, or other tax professional.
You should know that filing for bankruptcy won’t wipe out a tax lien that has already been assessed against your property, and therefore, even if you wipe out your personal responsibility to pay off the debt, your property can be used to satisfy the IRS amount owed. You’ll have to fully pay off your debt—regardless of its age—in order to get rid of a lien. (Learn more in What Is a Property Lien?)
If you owe any federal income taxes that aren’t dischargeable, you can use a Chapter 13 case to pay the debt over time. Under Chapter 13 bankruptcy, you propose a plan to pay all or most of your debts over a three- to five-year period. A Chapter 13 trustee will distribute your monthly payment among the creditors who file valid claims in your case, including the IRS. For the plan to be approved, it will have to provide that your entire nondischargeable tax debt, including interest and penalties, be paid in full by the end of the Chapter 13 plan.
You’ll include all of your debts in a Chapter 13 plan. A Chapter 13 case can help you keep property if you’re struggling with your mortgage, car loans, or unsecured accounts like credit cards while you’re paying off your income tax debt.
(You can learn more by reading about Chapter 13 bankruptcy.)