Anyone who owes back income taxes in Lakewood, Colorado, knows the feeling of dread when they see the past due notice. It is a common myth that tax debt cannot be removed in bankruptcy, but it depends on the type of tax owed and bankruptcy.
Tax debts in bankruptcy
Chapter 7 bankruptcy discharges certain nonexempt debts through a liquidation procedure that requires selling nonexempt assets. Chapter 13 makes paying debts more manageable for debtors who qualify under a repayment plan without selling assets. Chapter 11 works much in the same manner except it is mainly used by businesses with huge debt that exceed Chapter 13 limits.
Debts in bankruptcy fall under secured, unsecured, and unsecured priority, such as tax debt and property tax. Property tax debt less than one year commonly cannot get discharged under Chapter 7 bankruptcy law.
Some tax debts payable through Chapter 11 and Chapter 13 include employment tax, trust fund tax, sales tax, and property tax. Recorded federal tax liens cannot be discharged through any type of bankruptcy.
Income Tax under Chapter 7
The tax debt must meet some requirements to get discharged in Chapter 7:
•The debt must be only income tax, not property tax or tax owed on trust funds.
•The debtor must have filed the return with the debt a minimum of two years prior to the bankruptcy filing.
•The debtor must have filed returns for two consecutive years.
•The tax debt must be a maximum of three years old counting extensions.
If a return hasn’t been filed for the year of the debt, it can’t get discharged. The return in question cannot be fraudulent, and the taxpayer can’t have a tax evasion conviction.
The IRS must adhere to the repayment plan under Chapter 11 and Chapter 13 as long as the debtor pays current income taxes. The IRS may forgive old income tax debt in some circumstances.