Tax Elimination Through Filing Bankruptcy Under Different Chapters

Bankruptcy

Filing for Chapter 7 or a Chapter 13 and getting approved may discharge you from some kinds of personal income tax liabilities. However, if you meet certain requirements, you may even get discharged from all sorts of tax liabilities through filing bankruptcy.

Filing Under Chapter 7 And Taxes

If you filed your petition under chapter 7 and got subsequent discharge, some of the taxes will automatically be eliminated if the following criteria are fulfilled.

  • You must have filed the relevant tax return on time.

  • There must not be any fraudulent charges on you while you filed your case.

  • You had filed your return at least three years before the date of filing bankruptcy. It is very important for you to understand that any kind of IRS debts that you are liable for within the last three years will not be discharged even after the court declares you bankrupt.

  • In some cases, the late filing of tax return may be ignored as long as it was not an attempt to fraud and was filed at least two years before filing your petition. Your taxes may still be discharged. For example, if the return was filed in 1992 instead of 1988, and you filed your petition in 1996 under chapter 7 bankruptcy, the taxes may be discharged. However, make sure that such taxes have been thoroughly assessed by the IRS at least 240 days before you file your petition.

    • The Non-Dischargeable Taxes

    Sometimes, even if you meet all the above criteria, you may not get your tax liabilities discharged under chapter 7. For example, if the IRS has placed a tax lien on some of your assets, you are liable to pay such tax liabilities off in full. However, if you have been declared as bankrupt under chapter 13, the court may order the IRS to eliminate the penalties or agree to be paid as per the suggested payment plan.

    Filing Under Chapter 13 And Taxes

    Chapter 13 bankruptcy requires you to follow a repayment plan. You just have to focus on your finances and make subsequent payments to the trustee who in turn pays the creditors back on your behalf. Obviously, the creditors are not paid in full all at once. They get their money back in particular installments as has been suggested by the court. Similarly, the court can also ask the IRS to accept extended tax payments. However, you have to pay off the full amount of taxes over a period of 3 to 5 years. The tax penalties are usually discharged under chapter 13 because these penalties are considered as the amount owed to unsecured creditors.

    Overall, whether you file under chapter 7 or chapter 13, filing bankruptcy can be very useful in eliminating the taxes.