Previously, we began looking at the issue of discharging tax debts in bankruptcy. As we noted, it is possible to discharge tax debts, but certain requirements must be met and not all types of tax debt will qualify for discharge. We’ve already spoken briefly about the rules that apply to tax debt discharge.
With regard to the type of tax debt, some may be discharged and others may not. Nondischargeable tax debts include withheld payroll taxes, trust fund penalties, most state sales taxes, and certain excise taxes are never dischargeable. Among non-dischargeable tax debts, some are deemed priority debts and others non-priority debts, the difference being that non-priority tax debts are only paid in a bankruptcy plan after prior tax debts are satisfied.
Non-priority tax debts include those for which tax returns have not been filed, taxes on returns filed late within 2 years of the bankruptcy filing date, and taxes on fraudulent returns or taxes associated with willful attempts to evade or defeat due taxes. Tax debts which are not classified as nondischargeable—whether priority or not—are considered dischargeable in bankruptcy, provided all the requirements of the process are met.
In determining the dischargeability of tax debt, taxpayers are advised to obtain their transcript of record from the IRS, as this will show the taxpayer’s outstanding liabilities and which years they originate from, as well as filing dates, assessment dates, any penalties and interest, and extensions granted. It is especially important to have help in cases where fraud or evasion is alleged. Looking at these documents can also help determine which debts may soon be dischargeable, which could impact the timing of a bankruptcy filing.
An experienced bankruptcy attorney is an essential resource in the process, not only for helping determine the dischargeability of tax debts, but also for guiding a debtor through the entirety of the process.