For individuals burdened with tax debt, bankruptcy might seem like a way out. But not all taxes are treated the same under bankruptcy law. The possibility of discharging income taxes depends on several important factors. While sales and employment taxes are typically non-dischargeable, certain income tax debts may qualify—if specific conditions are met.
The Type Of Tax Makes A Difference
Federal and state tax laws separate taxes into different categories. Some, like payroll or sales taxes, are considered “trust fund” taxes. These are collected by a business or employer and passed along to the government. Because of their nature, these taxes cannot be discharged through bankruptcy.
Income taxes, on the other hand, may be treated differently. If the debt meets the right criteria, it can be discharged, meaning the individual no longer owes the amount once the bankruptcy is complete. But this only applies to personal income taxes and not other types of tax obligations.
Timing Requirements Must Be Met
To qualify for discharge, the tax return must have been filed on time, and the bankruptcy itself must be filed at least three years after the return’s original due date. For example, if someone owed taxes for the 2019 tax year, which were due in April 2020, they would need to wait until after April 2023 before filing for bankruptcy to have a chance at discharging that debt.
There is also a requirement that the tax assessment must be at least 240 days old before the bankruptcy filing. If the IRS reassessed or audited the return more recently, this timeline resets. These rules are strict and must be followed exactly.
Only Certain Bankruptcy Chapters Apply
Discharging income taxes is generally only possible under Chapter 7 or Chapter 13 bankruptcy. In Chapter 7, eligible tax debts can be fully discharged if the conditions are met. In Chapter 13, a repayment plan is created, and certain taxes may be paid over time, possibly at a reduced amount. At the end of the repayment period, remaining qualifying income tax debt may be discharged.
It’s important to remember that filing the wrong type of bankruptcy or filing at the wrong time can prevent discharge of the taxes altogether. That’s why it’s important to review all documents and dates carefully before moving forward.
The Importance Of Careful Review
In our work with clients, we’ve found that even small mistakes in timing or paperwork can change the outcome of a bankruptcy case. Reviewing the details of tax filings, assessment dates, and the type of tax debt is a critical part of the process. This helps us determine whether any part of the tax debt can be discharged, and if not, how it might still be handled within a bankruptcy plan.
Our Peoria, IL bankruptcy lawyer who understands both state and federal tax discharge rules can offer the guidance needed to make sure the filing is done correctly and at the right time.
Speak With Our Team Today
If you’re struggling with tax debt and considering bankruptcy, it’s important to understand what your options really are. At Pioletti Pioletti & Nichols, we help clients review their full financial picture and determine whether their income taxes meet the conditions for discharge. Contact us today to schedule a consultation and find out how we can help you take the next step toward relief.