Will Filing for Bankruptcy Discharge Your Tax Debts?

You may be able to get rid of or “discharge” certain tax debts if you declare bankruptcy. However, it doesn’t apply to all of your tax liabilities. Whether a debt can be discharged depends on the type of tax owed, how old the debt is, and your previous compliance with tax filing requirements. Let’s take a closer look at bankruptcy and tax debts so you can see if they apply to your situation.

Conditions for Discharging Tax Debts

Generally, your tax debt must meet at least one of the following requirements if you want to discharge by declaring bankruptcy:

• Tax Type: Only federal, state, and local income taxes are generally eligible for discharge.
• Three Years: The tax return with the debt in question must have been due at least three years before filing for bankruptcy.
• Two Years: The tax return must have been filed at least two years before the bankruptcy filing.
• 240 Days: The tax debt must have been assessed by the IRS at least 240 days before filing for bankruptcy.

Tax Debts You Cannot Discharge

Some types of tax debts typically can’t be discharged, such as:

• Trust fund taxes (withheld income taxes, FICA contributions, etc.)
• Taxes for which no return was filed, or filed late within two years of the bankruptcy
• Taxes associated with fraudulent returns

Tax Liens Remain in Effect

Keep in mind that even if a tax debt is discharged, tax liens recorded before the bankruptcy filing remain in effect. The IRS can, therefore, still enforce the lien and recover the debt from the property.

Should You Declare Bankruptcy?

If you’re not sure how you’ll pay your tax debt and are considering bankruptcy as an option, you should speak with a tax accountant first. Dealing with tax debts can be extremely complex, especially once you’ve declared bankruptcy. At Gabaie & Associates, LLC, we help taxpayers decide if bankruptcy really is the best option for settling their tax debts. If you live in Baltimore, Columbia, Frederick, Rockville, or anywhere in Maryland, our attorneys can help you with your tax situation.

Call (410) 358-1500 or contact us via our website to schedule a free consultation.