At Boxelder Consulting, our goal is to help you develop the best strategy to resolve your tax situation. In some limited cases, this may mean filing a petition for bankruptcy.
To be sure, filing for bankruptcy is not the solution for everyone with a tax-debt issue. However, depending on the specifics of your case, we may determine that either Chapter 7 or Chapter 13 bankruptcy represents your best course of action.
Let’s briefly go over the conditions under which back tax debt may be eliminated through bankruptcy. Then, let’s go over the types of tax debt that cannot be wiped out through bankruptcy.
Discharging Tax Debt in Bankruptcy
There are very specific and complex rules in regards to discharging delinquent tax debt through a bankruptcy.
The first rule is that only income taxes are eligible. In order to discharge back tax debt under a bankruptcy, the taxes must be either federal or state income taxes. For businesses, taxes on gross receipts are also eligible.
Next, the taxes must derive from a tax return which was due at least three years prior to the bankruptcy filing. The tax return must have been filed at least two years prior.
Additionally, the tax authority must have assessed the tax at least 240 days prior to the bankruptcy filing.
Finally, there cannot be evidence of willful tax evasion or fraudulent activity.
This is only a brief summary of the complex rules that apply to tax debt in bankruptcy, and these rules may not apply to every taxpayer’s specific case. In order to find the best strategy for your case, we will work closely with an experienced Chapter 7 or Chapter 13 bankruptcy attorney.
To recap, in order for tax debt to be forgiven in bankruptcy court:
- The taxes must be federal or state incomes or taxes from gross receipts.
- The taxes must derive from a tax return due at least three years prior.
- The tax return must have been filed at least two years prior.
- The tax assessment must have occurred at least 240 days prior.
- There can be no evidence of tax evasion or fraud.
Tax Debts That Cannot Be Discharged in Bankruptcy
Now that we’ve briefly summarized what can be discharged, let’s discuss what cannot be discharged when dealing with tax debts during bankruptcy.
Tax liens cannot be eliminated with bankruptcy. This means that the preexisting tax lien must be paid off with the profits from the sale of the secured asset.
You cannot discharge property taxes that were payable within one year of the bankruptcy filing. Property taxes that were payable earlier than one year prior to filing may be discharged. However, any liens associated with the property taxes follow the rule outlined above.
What’s more, certain excise taxes (such as customs duties) and employment-related taxes are non-dischargeable. Sales taxes are also non-dischargeable.
- Tax liens initiated prior to filing for bankruptcy cannot be eliminated.
- Property taxes that were payable within one year of filing are non-dischargeable.
- Certain excise taxes are non-dischargeable.
- Certain employment-related taxes are non-dischargeable.
- Sales taxes are non-dischargeable.
If you have back tax debt and are considering bankruptcy as a possible solution, reach out to the licensed tax professionals at Boxelder Consulting today. We can help you start your comeback story today.