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Discharging tax debt in bankruptcy: can it be done?

Those who file for bankruptcy may bring all kinds of debts to bankruptcy protection. Some of the more common forms of debt include credit card debt, unpaid medical bills, mortgage and car loans, student loans, and business debts. Another common type is tax debt.

Different types of debt are dealt with differently in the bankruptcy process. Certainly, one of the primary goals of bankruptcy protection is to see to it that as much debt is discharged as possible. Certain types of debt, such as credit card debt, will almost always be discharged in bankruptcy, as long as the debtor meets the requirements of the bankruptcy process. Other types of debt, such as student loans, may only rarely be discharged, when certain circumstances are present. Where exactly does tax debt fall? 

The short of it is that tax debt may be dischargeable in bankruptcy, but it depends on the timing and type of tax debt. To qualify for discharge, over three years must have passed since the tax return associated with the tax debt was due, including any extensions that were granted. Extensions include things like previous bankruptcy filings, innocent spouse relief, and tax assistance orders. Second, the tax return must have been filed over two years prior to the bankruptcy filing. There is an exception for a “substitute for return”, which does not trigger assessment or collections. A third rule is that at least 240 days must have passed since an IRS assessment has been initiated.

Aside from these rules, there are other things that can prevent discharge of tax debts, including filing a fraudulent return or attempting to evade or defeat taxes. In our next post, we’ll look at types of tax debt that may and may not be discharged.

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