For more information about taxes including resolution of tax issues outside of bankruptcy, read more at Wartchow Law’s Tax Blog.
Can I Discharge Taxes in Chapter 7 or Chapter 13?
Taxes are difficult to discharge in any form of bankruptcy, and often also difficult to predict with certainty what taxes will be discharged in bankruptcy. The criteria for discharging tax debt in either Chapter 7 or Chapter 13 bankruptcy is generally the following:
- The tax liability must be for income tax and not sales tax or payroll trust fund taxes such as employee withholding tax.
- The tax return must have been due at least three years ago, including extensions.
- The tax return must have been filed at least two years ago by you, and not by the IRS.
- There has been no audit or assessment of tax in the past 240 days.
Taxes that meet the criteria for dischargeable tax debt are usually treated as a general unsecured debt to be discharged in Chapter 7 or Chapter 13. If the tax in question does not meet this criteria, that tax liability is considered priority and non-dischargeable debt, meaning that the tax will typically survive a bankruptcy discharge.
Chapter 13 and Taxes
In a Chapter 13 bankruptcy, the way taxes are treated depends on how the taxes are classified. For example, if the tax would have been dischargeable in Chapter 7 bankruptcy because it meets all the criteria for dischargeable tax debt, then that tax is treated the same as your other unsecured creditors in that it will receive a portion of the monthly plan payment and discharge on the remainder after the Ch. 13 plan is successfully completed. The taxes that do not meet the discharge criteria, however, usually must be paid in full with accruing interest over the course of your Chapter 13 plan.
Some types of taxes are never dischargeable and will survive a bankruptcy. For example, any tax that is considered trust fund liability or trust fund tax will not be discharged. Nondischargeable trust fund taxes include personal liability for unpaid sales tax of your business, employee withholding tax (i.e., FICA and Medicare withheld from employee payroll), other employer tax and excise tax. Most people will not have liability for these types of taxes unless they run a business. Tax liens that have been filed against you will survive a bankruptcy filing, however the amount of liability may change or otherwise the total lien may paid off or satisfied in a Chapter 13 plan.
What Happens to My Tax Refunds If I File for Bankruptcy?
While most people are able to keep their tax refunds when they file bankruptcy, whether or not you keep your future tax refunds depends on several key factors, including if you file Chapter 7 or Chapter 13, how much the refunds will be, what the value of your other assets are, and whether you select to use state exemptions or federal exemptions to protect your assets. Your bankruptcy attorney will advise if you can expect to lose any of your tax refunds after a full review of the various factors involved.