How does bankruptcy affect tax debt?

 Posted on September 17, 2021 in Tax Debt

Under many circumstances, it is not possible to discharge tax debt during bankruptcy. For example, most chapter 7 filings require payment of tax debt first, making them a priority among other types of debt.

Despite these standards, it is sometimes possible to discharge tax debt via bankruptcy. In order to do so, the filer must meet certain relevant criteria. The following are a few of those criteria and why they matter.

The age of the tax return and debt

You can only include returns filed two years prior in bankruptcy cases. When it comes to the age of the debt, cases can only include debt three years old or older. If the return or debt occurred more recently, you cannot include it. Additionally, returns that were never filed are not eligible for discharge.

The age of the assessment

Assessment means that you filed a return and the IRS accepted that return. An assessment can also result from an audit conducted by the IRS. In either case, 240 days or more must have passed between the assessment and the filing.

The legal status of the tax return

Filing a fraudulent return or purposely evading paying taxes excludes you from including your tax debt in your bankruptcy filing. The IRS has strict rules about what constitutes evasion and fraud and will apply them to returns that raise any red flags. In this case, you cannot include the debt with your filing. You may also receive a punishment or penalty for fraud or evasion.

Your prior filing history also matters. For example, you must show proof that you have filed tax returns for the previous four years for your case to have merit.