Discharging Taxes in Bankruptcy

There may be situations in which all other collection alternatives won't work. In those cases, certain taxpayers may obtain relief through bankruptcy. Bankruptcy can help you contest the amount of tax at issue and, if properly timed, it can provide a much needed fresh start.

Generally, all taxes are dischargeable in bankruptcy, subject to the following exceptions:

• Taxes are non-dischargeable if the return was due less than three years prior to the filing of the bankruptcy petition.
• Taxes are non-dischargeable if assessed less than 240 days prior to the filing of the bankruptcy petition.
• Taxes are non-dischargeable if the return was not filed, or was filed less than two years prior to the filing of the bankruptcy petition.

   

When a bankruptcy petition is filed, an "automatic stay" arises, and the IRS must cease all collection efforts. In bankruptcy, the IRS can either be a secured creditor (if it has filed a tax lien), or it can be an unsecured creditor (if it did not file a lien). It derives that, like any other creditor, the IRS can be partially secured or partially unsecured.