When Can You Get Back Income Taxes Written Off in Bankruptcy and When Are They Unavoidable?

Income taxes can be forgiven in bankruptcy sometimes

Image source: Flickr Creative Commons User Chris Potter

Income taxes are a type of debt and, if they go unpaid, can be the most difficult type of debt to get out from under besides student loans. There are only a couple of ways to get out of paying tax debt – wait out the government's typical collection period or request that they be discharged in bankruptcy. Back taxes alone aren't a good reason to file bankruptcy, but if you have other unsecured debts like medical bills and credit card debt that are piled up, past due and that you don't have the means to repay, it's definitely something to consider.

Here are the circumstances under which you can typically have back tax debts forgiven in bankruptcy:

#1 The taxes must have been due more than three years ago. So, for a bankruptcy filed in 2014, only taxes due in 2011 and prior will be eligible for discharge.

#2 The taxes must have been filed pretty much on time. If you couldn't file on time and filed an extension, then filed your taxes within the period granted by the extension, that should be okay.

#3 The taxes must have been assessed at least 240 days prior to the filing. Taxes are usually assessed right after the returns are received, so this shouldn't be a problem.

#4 The taxes must have been assessed on returns you filed, not returns the IRS filed on your behalf because you failed to file tax returns (called substitute returns).

#5 The tax returns were not filed falsely or with intent to evade taxes or to defraud the government. Simply being unable to pay your tax debts is not evidence of fraud by itself.

#6 The taxes must be federal or state taxes, not property taxes, withholding taxes, sales taxes, FICA, excise taxes or other non-income taxes.

To find out which, if any, back taxes can be discharged, you first need to get a tax transcript – click here to get yours. If you owe back taxes other than income taxes, Chapter 13 can give you time to pay them over the three to five years of your repayment plan. If you file Chapter 7 and have significant assets, the IRS or other tax agency that you owe will expect you to liquidate assets to satisfy tax debts that are considered “priority tax debts.”

Under Chapter 13, your back income taxes can become part of your repayment plan, and any available disposable income can be put toward these. At the end of the repayment plan, if you have any remaining balances that fit criteria one through six above, remaining balances may be discharged. Under a Chapter 7 plan, taxes that fit criteria one through six above may be dischargeable along with your other unsecured debts.

The IRS or state tax agency may push back and your lawyer may need to fight to get these forgiven. This is why it's critical to have an experienced and local bankruptcy attorney to file your petition and get you the best possible results and most complete debt relief results. Contact the law offices of John T Orcutt for a free consultation on your debt dilemma to find out what solution will give you the financial fresh start you need.