What To Know About Discharging Tax Debts During A Chapter 7 Bankruptcy

When your debts become so overwhelming that bankruptcy seems like the best choice, there's likely a component of your debt that is owed to the Internal Revenue Service for personal or business taxes. In fact, many people are only interested in filing for Chapter 7 bankruptcy in particular because they're having trouble paying back the IRS. Before assuming that filing for bankruptcy will eliminate your issues with taxes, make sure you understand these four facts about discharging tax debts with Chapter 7 filings in particular.

Type of Tax

Under the laws of Chapter 7 bankruptcy, only personal income tax qualifies for being discharged with no future expectation of payment. Any business debt, payroll tax owed on payments made to employees, and other types of debt can't be discharged under this type of bankruptcy. Both state and federal income taxes qualify for this kind of discharge, but they still must meet other requirements before you can assume they'll be wiped out.

Age of Debt

First, you can only discharge income tax debts that are more than three tax years old. For example, debt generated during the 2015 tax year becomes eligible for inclusion in a Chapter 7 bankruptcy in 2018. You also need two years to pass between the filing of the tax return that assessed the amount of debt and your bankruptcy procedure. Knowing these time frames can help you plan the perfect timing for a bankruptcy to include as many of your debts as possible, or it may inspire you to choose an alternative plan for reducing some of your debts that won't qualify for your current bankruptcy.

Status of Return

You can only discharge an income tax debt connected to a properly filed tax return. Even if the tax return was late or amended, it still counts for the purposes of qualifying the debt for Chapter 7 bankruptcy. If the IRS estimated the debt because you failed to file a return when they had other evidence of your income, you can't discharge it with this kind of bankruptcy.

Accusation of Fraud

Finally, income tax debt can't involve any accusations of fraud, evasion, or other illegal behavior. If you were found innocent through an investigation that has been completed, you may still be able to include the debt in a Chapter 7 filing. Ongoing investigations and completed claims in which you were found guilty definitely disqualify the tax debt from being discharged.