Generally, in order to discharge a tax debt during bankruptcy, the tax debt must meet all four of the following criteria: (1) the tax must be income taxes or “gross receipt taxes;” (2) the tax must be over three tax years old; (3) your tax return must have been filed on time; and (4) the tax debt must not be amended or challenged by the IRS as inaccurate.
There are four different types of tax debts that are automatically excluded from your bankruptcy discharge:
- unpaid taxes due within three years of the bankruptcy filing;
- unpaid taxes for returns filed late, but within two years of the bankruptcy filing;
- unpaid taxes for tax years when the debtor did not file a return; and
- unpaid taxes due when the debtor filed a fraudulent return or tried to evade the tax obligation.
If you have any question whether your tax debt can be discharged during your bankruptcy, consult with your attorney. Some tax penalties can also be discharged, so be sure to discuss exactly what portion of your tax debt will be discharged, and what portion will survive.
Tax liens can be stripped off during a Chapter 13 bankruptcy to the extent that the lien is more than the equity in property. Tax liens cannot be stripped or otherwise avoided in Chapter 7. However if the tax is dischargeable in a Chapter 7, the bankruptcy court should determine the extent of the tax lien against your property.
Property taxes are treated differently after bankruptcy. Your personal obligation to pay property taxes can be discharged if the tax was last payable without penalty more than one year before you file bankruptcy. However, property taxes are secured with a lien which will generally survive the discharge. If you keep the property, you must pay the tax debt after the bankruptcy. If the property is surrendered during the bankruptcy, you will owe nothing.
The intersection of tax and bankruptcy is a complicated area of the law. It is important to address any tax issues early in your case and have a clear understanding of how you and your attorney will deal with your tax debt during your bankruptcy.