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Taxes in Bankruptcy 

Bankruptcy can be an effective tool to avoid offsets from various taxing authorities, elimination of tax debt, or compelling taxing authorities to accept payments plans outside of what would normally be permitted by the taxing authority.

Image by Olga DeLawrence
Image by Olga DeLawrence

You can get rid of certain Tax Debt in Bankruptcy

Taxes are the debts that are most frequently nondischargeable in bankruptcy cases. However, it is important to realize that not all taxes are nondischargeable.

Only the types of taxes listed below are not discharged in a bankruptcy case, however, not being discharged does not eliminate the possibility of a favorable payment plan for the debtor under the code:

  1. Any tax for which a return, or equivalent report or notice, if required, was not filed, for which a fraudulent return, report, or notice was filed, or which the debtor willfully attempted to evade;  

  2. Any tax with respect to which a late return was filed within two years before the date of filing of the bankruptcy;

  3. Taxes on income or gross receipts
    (a) for which a return, if required, was last due within three years of the filing of the bankruptcy, or
    (b) assessed within 240 days before filing of the bankruptcy, or
    (c) not yet assessed, but assessable after filing of the bankruptcy;

  4. Property taxes assessed before commencement of the case and last payable without penalty less than one year before filing of the bankruptcy;

  5. Excise taxes
    (a) On transactions as to which a return was required and last due less than three years before the bankruptcy, or
    (b) On transactions, as to which no return was required, which occurred less than three years before the bankruptcy;

  6. Taxes required to be collected or withheld by the debtor, such as employment “trust fund” taxes (income taxes and FICA withholding) or sales taxes.

NON-DISCHARGEABLE TAXES

Any penalties related to nondischargeable taxes are also nondischargeable, unless the penalty is solely punitive in nature or relates to a transaction that occurred more than three years before the filing of the petition.  Erroneous refunds of nondischargeable taxes are similarly nondischargeable.