If tax debt is part of the overwhelming financial obligations that lead a person to consider filing Chapter 7 bankruptcy, it's essential to consider whether any of that debt and penalties assessed for it can be discharged in the bankruptcy.
In some instances, it can be. However, certain conditions have to be met. For example:
-- The debt must have been assessed by the Internal Revenue
-- Service at least 240 days prior to the bankruptcy filing. That period may be extended if the IRS suspended its collection activity at some point.
-- The debt must be from a return that was due at least three years prior to the bankruptcy filing.
-- The person filing for bankruptcy filed legitimate tax returns for at least two tax year prior to the bankruptcy.
-- The debt must involve income taxes.
-- The person filing for bankruptcy didn't commit willful tax fraud or tax evasion.
If a tax debt is dischargeable in bankruptcy, the IRS can't garnish a person's wages or bank accounts to collect it. However, if a federal tax lien was placed on a person's property, it will remain until the lien is paid off.
Certain types of tax debt are not dischargeable. These include debt for payroll tax, trust fund taxes, withholding taxes, unfiled tax returns and penalties for any type of tax debt that's not dischargeable.
An experienced New York bankruptcy attorney can advise you on how much of your tax debt can be discharged. He or she may also be able to help you work out an agreement with the IRS for a repayment plan or to pay less than is owed.
Source: FindLaw, "Bankruptcy and Taxes: Eliminating Tax Debts in Bankruptcy," accessed Nov. 29, 2016