What Tax Liabilities Can Be Discharged in Chapter 7?
The Bankruptcy Code strictly limits the ability of debtors to discharge tax liabilities in Chapter 7 bankruptcy. Taxes are considered priority debts, which means they are among the first to be satisfied from any funds derived from liquidation of the debtor’s assets. However, there are exceptions to the general rule.
Certain income tax debts can be discharged, depending on their age. The following criteria must be met:
- The due date for the tax return was at least three years before the bankruptcy filing.
- The tax return was filed at least two years ago.
- The tax assessment was made at least 240 days ago.
- The tax return in question was not fraudulent.
- The taxpayer was not guilty of tax evasion.
Interest and penalties associated with these tax returns are also dischargeable. However, debts arising from payroll taxes, tax debts from unfiled returns and trust fund taxes are not eligible.
The time limitations are rigidly enforced by the bankruptcy courts. The IRS has successfully opposed discharge of taxes over discrepancies of only a few days as to due dates or filing dates of returns.
Additionally, in order to discharge an income tax debt, petitioners must prove to the bankruptcy court that they have filed their last four income tax returns. They must also provide a copy of their most recent return to the court and to any creditors who request it.
The prohibitions on fraud and tax evasion are also strictly enforced. Bankruptcy courts have found fraud in instances where debtors file an incomplete or inaccurate return, fail to keep accurate records or do not cooperate with the IRS. Similarly, the courts have denied discharge of tax debts where debtors concealed assets, made fraudulent transfers or significantly understated income.
Debtors should also be aware that if the IRS has placed a lien on their property, the discharge of the underlying tax debt will not dissolve the lien. The debtor will have to either settle the lien or sell the property and pay off the lien with the sales proceeds.
Timing is important in any bankruptcy proceeding, but it is especially important when trying to discharge tax debt. Knowing what kinds of taxes can be discharged is complex. Why not get free expert help?
At the Law Offices of Michael Jay Berger, we help clients with Chapter 7 discharge of debts. Our Beverly Hills lawyers have decades of experience handling the full range of bankruptcy proceedings. Schedule a free initial consultation with one of our attorneys by calling 310-271-6223 or contacting us online