Chapter 7 bankruptcy and IRS tax debt

December 7, 2009

Some, but not all, tax debts are dischargeable in Chapter 7 bankruptcy. In order to have your tax debts discharged under a Chapter 7 bankruptcy, you must meet all five of the following conditions:

  1. The debts are income taxes. Taxes other than income tax, such as fraud penalties, cannot be discharged in bankruptcy.
  2. You filed a tax return for the debt you want to discharge at least two years before filing for bankruptcy.
  3. The tax debt is at least three years old.
  4. You pass the 240-day rule. This rule requires that your tax debt was assessed by the IRS at least 240 days before you filed for bankruptcy, or, alternatively, that the debt has not yet been assessed.
  5. You have not committed tax fraud or willful tax evasion.

Note that you cannot discharge a federal tax lien under Chapter 7 bankruptcy. If the IRS already recorded a tax lien on your personal property before you filed for bankruptcy, then the tax lien will remain in place. The upshot is that you have to pay off the lien before you are allowed to sell the property.

For free legal advice on tax debts and other issues related to Chapter 7 bankruptcy, contact Fears | Nachawati. To speak with one of our Texas bankruptcy lawyers, simply email us or phone us toll free at 1.866.705.7584.

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