Common Tax Issues in Bankruptcy Explained

Table Of Contents

What Are Dischargeable Taxes in Bankruptcy?

Dischargeable taxes in bankruptcy are certain tax debts a debtor no longer needs to pay after bankruptcy. The Internal Revenue Service has specific rules for tax dischargeability. Income taxes are often dischargeable under specific conditions. Property taxes are sometimes dischargeable. Some other taxes are never dischargeable.
The age of the tax debt impacts dischargeability. Tax returns are filed for the tax debt to be dischargeable. The tax debt is at least three years old. The tax assessment is at least 240 days old. The tax debt does not involve fraud.

How Does Fraud Affect Bankruptcy Tax Issues?

Fraud affects tax dischargeability significantly. Tax debts resulting from fraud are never dischargeable in bankruptcy. Debtors who commit tax fraud cannot eliminate those tax obligations. The bankruptcy court does not permit discharge of fraudulent tax liabilities.
A debtor commits tax fraud by deliberately misrepresenting income. A debtor commits tax fraud by intentionally evading tax payment. The Internal Revenue Service investigates tax fraud thoroughly. Proof of fraud prevents any discharge of the associated tax debt. Debtors facing fraud allegations need specialist legal advice.

When Are Unfiled Tax Returns an Issue?

Unfiled tax returns are an issue when a debtor seeks bankruptcy protection. A debtor must file all required tax returns before bankruptcy. The bankruptcy court requires complete tax documentation. Unfiled tax returns create significant obstacles to discharge. The court cannot discharge taxes for unfiled periods.
A debtor needs to file all tax returns to determine the exact tax liability. The Internal Revenue Service cannot process a bankruptcy without filed returns. A debtor filing bankruptcy must comply with all tax laws. Failure to file tax returns complicates the entire bankruptcy process. Debtors should consult a tax professional before filing.

Which Tax Liens Remain After Bankruptcy?

Tax liens remain after bankruptcy for secured tax debts. A tax lien is a legal claim against a debtor's property. The Internal Revenue Service places tax liens on assets. Bankruptcy discharges the underlying tax debt, not the tax lien itself. The tax lien continues to attach to the property.
A tax lien makes sure the government receives payment from the property's sale. The property remains subject to the tax lien even after discharge. Debtors must address tax liens separately from the debt discharge. Some tax liens can be avoided in specific bankruptcy chapters. A debtor needs legal counsel to assess tax lien options.

What Is a Tax Refund Intercept in Bankruptcy?

A tax refund intercept is when the government seizes a debtor's tax refund. The government uses the refund to pay off outstanding debts. Federal agencies can intercept federal tax refunds. State agencies can intercept state tax refunds. This action happens even during bankruptcy proceedings.
A tax refund intercept applies to various types of debts. Child support arrears trigger tax refund intercepts. Student loan defaults trigger tax refund intercepts. Unpaid taxes also trigger tax refund intercepts. The intercept process diverts the refund directly to the creditor. Debtors should anticipate a tax refund intercept if they have outstanding government debts.

How Does Chapter 7 Impact Common Tax Issues In Bankruptcy?

Chapter 7 impacts tax debts by potentially discharging older, unsecured income taxes. Chapter 7 bankruptcy is a liquidation bankruptcy. Chapter 7 discharges many types of unsecured debt. Specific tax debts meeting stringent criteria are dischargeable. The tax debt must be old enough.
Chapter 7 does not discharge every tax debt. Fraudulent tax debts are not dischargeable in Chapter 7. Tax liens on property are not removed by Chapter 7 discharge. The debtor's income tax liability from recent years is generally not dischargeable. Debtors considering Chapter 7 need to understand tax discharge rules.

FAQS

What is the look-back period for tax dischargeability?

The look-back period for tax dischargeability is three years. The tax return must have been due at least three years before the bankruptcy filing. The tax debt must meet other specific criteria as well.

Are all property taxes dischargeable in bankruptcy?

Not all property taxes are dischargeable in bankruptcy. Property taxes are generally secured debts. A discharge often removes the personal liability for the tax. The tax lien on the property usually remains.

Can a debtor discharge trust fund taxes in bankruptcy?

No, a debtor cannot discharge trust fund taxes in bankruptcy. Trust fund taxes are taxes withheld from employee wages. These taxes include income tax and social security tax. The government considers these taxes a fiduciary responsibility.

Does bankruptcy eliminate interest and penalties on tax debts?

Bankruptcy sometimes eliminates interest and penalties on tax debts. A dischargeable tax debt means the associated interest and penalties are also dischargeable. A non-dischargeable tax debt retains the non-dischargeable tax debt's interest and penalties.

What happens if a debtor files a false tax return before bankruptcy?

What happens if a debtor files a false tax return before bankruptcy? The associated tax debt is not dischargeable. The bankruptcy court does not discharge debts arising from fraud. The debtor remains liable for the fraudulent tax debt.

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