Under the present bankruptcy laws, certain income tax debts are eligible for discharge. However, before you go filing for bankruptcy it is advisable to find out whether you can seek income tax debt discharge under Chapter 7 or 13.
Individual tax payers can seek discharge under Chapter 13 or 7. According to the current bankruptcy law, your income tax debts should meet five criteria to get a discharge.
Five Criteria That You Must Meet
The first rule states that your tax debt must be related to a tax return that was due at least three years before the date you filed for bankruptcy. The due date would include all the extensions granted. The second rule states that the tax return that you have filed must have been done at least two years before the date you filed for bankruptcy. The date that you actually filed the return would be the day from which the two years will be calculated. According to the third rule, when you file for bankruptcy, the IRS assessment of your tax must be at least 240 days old. As per the fourth rule, the tax return that you have shown cannot be fraudulent or frivolous. The fifth rule states that you cannot be guilty of tax evasion.
Tax Debts
In bankruptcy cases, the debtor’s debts are assigned priorities in terms of payment. In other words, the debts that are high on the priority list are paid first and thereafter the next ones. In most of the bankruptcy cases, the pre-petition tax debts are classified as eighth priority claims.
You might be wondering which taxes would be termed as pre-petition tax debts? Unsecured taxes that meet the above mentioned five criteria would fall in the pre-petition tax debts. Other than that the following would also be included:
• Your employer’s share of employment taxes on your wages or commissions paid as priority claims under 11 USC 507(a) (3). Or for employer’s share of employment taxes for which a return is due within 3 years of the filing of the bankruptcy petition.
• Excise taxes on transactions that you conducted before the date of filing of bankruptcy and the return is due within 3 years of filing of the bankruptcy petition. If a return is not required, then the excise taxes will only include those for which the transaction occurred at least 3 years before the date of filing of the bankruptcy petition.
Under Chapter 7
If you are filing for Chapter 7 bankruptcy, the eighth pre-petition taxes would be paid off after liquidating your assets. However, they will only be paid off if prior claims on the list are already paid off. If after paying off the secured creditors, any unsecured ones funds are left, then only the tax debts will be paid off. Otherwise you will secure a discharge for these tax debts.
You should also understand that when it comes to paying eighth priority pre-petition taxes, different rules apply depending on the bankruptcy chapter that you have filed under. If you are filing under Chapter 13, taxes that are over 3 years old can be paid off. If you are filing for Chapter 11, you can pay the taxes over a period of 6 years from the date of assessment. You are also required to pay the interest on these taxes.
Certain taxes are given priority over other taxes when it comes to paying them under bankruptcy. For example, taxes that you incurred during the administration of the bankruptcy estate would be paid first.
If you are involved in an involuntary bankruptcy case, the tax debts that arose in the ordinary course of your business or financial affairs after the bankruptcy petition was filed but before the trustee was appointed or the order for relief was given, are included as second priority on the tax list.
If you are filing for bankruptcy in order to get discharge from your tax debts, it is best to first consult a lawyer to see whether you qualify for the discharge or not.