In response to questions we get over and over, here is our totally unofficial Guide to Discharging Taxes in Bankruptcy. We’ve gathered many of the tried-and-true rules on the topic but beware! The rules and decisions are constantly evolving, so take this guide with a grain of salt and always consult a competent Bankruptcy Attorney before making any decisions. Okay, enough disclaimers. Here it is:
Chapter 7 Liquidation
In a Chapter 7 liquidation Bankruptcy – whether an individual or a business entity – taxes can be discharged as long as:
(1) They relate to a return due 3+ years before a filing;
(2) That tax return was filed 2+ years before the filing;
(3) They weren’t assessed within 240 days before filing;
(4) That return was not fraudulent or frivolous; and
(5) Taxpayer/debtor not found guilty of evading tax laws.
Note: Even if the tax debt in question does not qualify under these criteria, penalties may still be discharged in Chapter 7 if the events that gave rise to the penalties occurred 3+ years before the filing date.
In such a situation the whole claim, including penalties and interest, would be listed on Schedule E and bifurcated into the non-dischargeable and dischargable portions. The non-dischargeable portion would be listed in the “Amount Entitled to Priority” column of Schedule E, while the dischargable balance would be identified as “non-priority” and listed in the “Amount Not Entitled to Priority” column. The non-priority penalties do not get listed again on Schedule F.
Chapter 13 Reorganization
Taxes that do not qualify for discharge in Chapter 7 can stll be paid over 3 to 5 years in Chapter 13
(1) Interest stops accruing the moment the Chapter 13 bankruptcy is filed so payments are interest-free.
(2) Most tax penalties are treated as non-priority, unsecured debt and typically discharged or 10-15 cents on the dollar or less.
(3) In such case, tax penalties area still bifurcated from the priority tax claim and listed as “non-priority, unsecured” claims.
Note: If a tax lien has been recorded against the debtor’s real or personal property prior to the bankruptcy filing date, then the tax claim should be listed on Schedule D as secured – not on Schedule E as unsecured priority. That lien will be eliminated if there is no equity in the underlying property, or reduced to the present equity value of the debtor’s interest in that property as of the filing date of the case.
Want to know more about tax discharge strategies in Bankruptcy? Contact M. Hedayat & Associates, P.C. for your confidential consultation.