A common client question we hear is, “Can I discharge taxes in bankruptcy?”  Like so many other law-related issues, the answer is, “It depends.”

Most taxes cannot be discharged in Chapter 7 bankruptcy.  As soon as you receive a Chapter 7 discharge, the IRS will start aggressive enforcement actions against you again. Very generally speaking, income taxes more than three years old can be eliminated in Chapter 7 bankruptcy.  However, taxes for returns files less than three years ago, and any type of taxes other than income taxes — sales taxes, wage withholding taxes for example — are never dischargeable in Chapter 7 bankruptcy.

It is imperative, if you are a target of the IRS, that your tax situation be carefully reviewed by a Denver bankruptcy attorney.  We have seen cases handled carelessly filed by bankruptcy mills under Chapter 7 when a client would have been better served by Chapter 13.  There are many good reasons to file Chapter 13; unpaid taxes is near the top of the list.

Solve your tax problems through Chapter 13 bankruptcy

In Chapter 13 bankruptcy, you get up to five years to pay the IRS.  But that’s not the best part.  The penalties that continue to mount — making payment next to impossible — stop entirely when you file Chapter 13 bankruptcy.  You can pay the IRS what you owe now, without further penalty, over a five year time frame in a bankruptcy reorganization plan.  

In a Chapter 7 bankruptcy, certain taxes can be discharged.  Speaking very generally, income taxes that were due more than three years ago can be discharged if the tax returns were filed as required.  It is a more complicated than that but in general the analysis starts there.

The taxes that aren’t three years old or that aren’t dischargeable for any other reason are called “priority taxes.”  Priority taxes, generally speaking, involve (a) income taxes for returns filed less than three years ago,  (b) taxes assessed less than 240 days ago, or (c) employer payroll taxes or sales taxes regardless of how old they are.

If in the final analysis your taxes cannot be discharged in Chapter 7 bankruptcy, then you should consider Chapter 13 bankruptcy.  In Chapter 13, your taxes can be restructured so that you can afford to pay them over time.  Ongoing penalties stop when Chapter 13 is filed.  This enables most people to get out from under their IRS debt within three to five years — something that might not be possible if high interest and penalties were to continue to accrue.  It also enables you to avoid IRS levies on your income and property.   If a tax lien is already in place, you can file bankruptcy to prevent the IRS from renewing the tax lien when it expires.

Filing a Chapter 13 bankruptcy is better than hiring a CPA or tax lawyer to negotiate an Offer in Compromise if you have a lot of other debt weighing you down.  While the IRS gets paid without penalties in Chapter 13, your other unsecured creditors are largely written off for pennies on the dollar in most cases.