Not surprisingly, bankruptcy itself is a highly complicated process, but even more so when the IRS and tax debt are involved. Tax debt can be challenging to remove, but not impossible. Here are the rules regarding when the IRS can discharge tax debt. Note: Applicants must meet all the criteria for discharge. Also note that no matter the financial situation at the time, filing taxes on time is highly recommended.

What Types of Tax Debt Can Be Discharged?

Two types of tax debt can potentially be discharged in bankruptcy: Taxes on wage-related income and taxes on business income (gross receipts). These are both income taxes. Any other type of tax debt, including payroll taxes or fraud penalties, is ineligible.

Is There a Mandatory Time Frame for When the Tax Debt Was Incurred?

The taxes must have been due at least three years before the bankruptcy was filed. That means the taxes were filed, and the IRS has records showing what taxes were due, and they were due at least three years earlier. This includes extensions that the IRS deemed valid.

How Long After the Tax Debt Was Incurred Can Bankruptcy Be Filed?

The bankruptcy filing must take place a minimum of two years after the tax debt was incurred. It’s important to note that the tax debt must result from legitimately filed taxes. If the return wasn’t filed, was filed late, or if the IRS filed a substitute return, the debt will not be discharged in bankruptcy.

What is the “240-Day Rule?”

The 240-day rule states that the IRS must have assessed the income tax debt at least 240 days before bankruptcy is filed or not assessed at all. This can vary if there was previously an offer on tax debt or an earlier bankruptcy filing still in process.

What Are Other Requirements to Have Tax Debt Discharged in Bankruptcy?

If the IRS determines that someone committed tax fraud or deliberately tried to avoid paying taxes in a specific year or years, the tax debt still stands regardless of bankruptcy status.

What Type of Bankruptcy Is Better for Discharging Income Tax Debt?

If the above criteria are all met, it’s possible to wipe out tax debt with a chapter 7 bankruptcy. If the criteria are not met, it might be wise to look at chapter 13 instead. Chapter 13 won’t wipe out the tax debt, but it can set up a payment plan that would be more manageable and reduce collection efforts.

Let Us Advise You

Bankruptcy is a complicated process, especially if the IRS is involved. Rather than try to go it alone, it’s highly recommended that a bankruptcy attorney is brought in to leverage their knowledge and experience. If you or someone you know needs assistance with bankruptcy, particularly if the IRS is involved, call us at 708-575-1500 to work with an experienced bankruptcy attorney.