Under bankruptcy code, tax debts are considered the same way as other debts in both Chapter 7 and Chapter 13 proceedings. Chapter 7 affords for full discharge of permissible debts. Chapter 13 provides a payment plan to repay some debts, with the remainder of debts discharged. However, not all tax debts are capable of being discharged in bankruptcy.
Taxes other than income tax, such as payroll taxes, a 100% penalty, Trust Fund Recovery penalty, fraud penalties, or several other unusual kinds of taxes are by law excepted from bankruptcy discharge. Income tax debts may be eligible for discharge under Chapter 7 or Chapter 13 of the Bankruptcy Code.
Income taxes can be discharged in a Chapter 7 bankruptcy but only if all of the following tax code rules are met:
- the tax return on which the tax debt arises must have been due at least three years before filing bankruptcy;
- the tax return was filed at least two years before the bankruptcy;
- the taxes were assessed by the IRS at least 240 days before filing;
- there was not a fraudulent or frivolous tax return; and
- there was no intentional act of evading the tax laws.
Tax debts that arise from unfiled tax returns are not dischargeable. Before a Chapter 7 or Chapter 13 bankruptcy can be granted, the bankruptcy petitioner is required to prove that the four previous tax returns have been filed with the IRS. The four previous tax returns must be filed no later than the date of the first creditors’ meeting in a bankruptcy case.
Additionally, bankruptcy petitioners are required to provide a copy of their most recent tax return to the bankruptcy court. Creditors can also request a copy of the tax return, and petitioners must provide a copy to them.