Any number of things can contribute to overwhelming debt that leads people to file for bankruptcy. Medical bills are often a factor. So are credit card bills, student loans and just the cost of living exceeding income.
What if part of the reason you’re underwater is tax debt? Can tax debt be discharged in bankruptcy? It depends.
When is tax debt dischargeable?
You may be able to discharge tax debt under the following circumstances:
- Three years must have passed since the taxes were due. For example, if you were unable to pay your income taxes that were due in May of this year, you can’t discharge them until 2024.
- You must have filed a tax return (on time or late) for the year the tax was due, even if you weren’t able to pay what you owed. Further, that return must have been filed at least two years prior to your bankruptcy filing.
- If taxes you owe were assessed separately from your tax filing (for example, as the result of an audit), that assessment date must be within 240 days of your bankruptcy.
Finally, you cannot discharge tax debt that you knowingly evaded paying or that you engaged in tax fraud or evasion to avoid or minimize. Not being able to pay your taxes isn’t the same as tax evasion, which is a crime. Tax evasion is when someone deliberately fails to pay or underpays the taxes they owe.
What a tax debt discharge will not accomplish
If the IRS or other entity has placed a tax lien on your home or other property, that lien remains. This can make it very difficult to sell the property. Further, discharging past tax debt has no influence on subsequent taxes. Anything you owe for the years after the debt you’re discharging is still owed.
As you can see, discharging tax debt when you file for bankruptcy can be an option. However, you need to understand the timelines, requirements and limitations before you try to do it.