• 619.866.3444
  • info@socal.law
  • ProVisors
  • Payments
Gupta Evans and Ayres
  • What We Do
    • Bankruptcy
    • Business Litigation
    • Real Estate Litigation
  • Who We Are
  • Our Team
    • Ajay Gupta
    • Chris Evans
    • Jake Ayres
    • Alessandro Nolfo
    • Mike Covington
    • Elontay Collins
  • How We Help
    • Referral Partner Process
    • Legal Proceedings Process
    • Case Stories
  • Resources
    • The Blog
    • Our Events
    • For Lawyers
    • Useful Forms
    • Video Library
  • Payments
  • Get In Touch
  • Search
  • Menu Menu
taxes

Are Taxes Dischargeable in Bankruptcy?

May 9, 2016/in All Blog Posts, Bankruptcy/by Ajay Gupta

One of the most prevalent misconceptions that people have about bankruptcy is that you cannot discharge tax debts under a Chapter 7 discharge. Chapter 7, the ‘liquidation’ bankruptcy, is the most common bankruptcy chapter and the one people most often assume when thinking of bankruptcy. You can, in fact, discharge income tax debts if they meet all of the criteria outlined below.

  1. The tax debt is income-based. Income taxes are the only type of tax debt dischargeable under Chapter 7. In order for taxes to be dischargeable, the tax debt must be for federal or state income taxes or taxes on gross receipts.
  2. The tax debt is at least three years old. To eliminate tax through Chapter 7, the tax debt must be from a tax that was due at least three years ago. This date includes all valid extensions. For instance, if taxes were disclosed in a 2015 tax return for which extensions to file the return expired on October 15, 2016, the due date test will be satisfied only if the bankruptcy petition is filed after October 15, 2019.
  3. The tax return was filed at least 2 years ago. If you wish to discharge tax ability, you must have filed your return at least two years before filing your Chapter 7. In most courts, a late return (when the IRS filed a substitute return on your behalf after all of your extensions expired) does not “count” as a return and thus the tax debt is deemed to be nondischargeable. In some courts, however, you can discharge tax debt even if you file a late return, assuming you meet the other criteria outlined here. In general, San Diego bankruptcy tend to allow debtors to discharge tax returns filed after all extensions expired, if they meet all other criteria.
  4. The “240-Day Rule”. To discharge tax debt, the taxing authority must have assessed the tax (entered the liability on the taxing authority’s records) against you at least 240 days before you filed bankruptcy. This time limit may be extended if there was an offer in compromise between the taxing authority and you, or if you had previously filed for bankruptcy.
  5. No fraud or willful evasion. You cannot receive a discharge of tax debt if you have been deemed guilty of any intentional act of evading any tax law. if you file a joint return, the taxing authority must prove that both you and your spouse committed an act of fraud related to the applicable return or willfully attempted to evade the tax in order to deny a discharge of the tax debt.

To put all of this is a nutshell, if your tax debt is income-related, from 3 or more years ago, and you filed your return(s) relatively timely without any major incidents or problems, your tax debt is likely dischargeable under Chapter 7.

THE FOLLOWING TAX RELATED DEBTS ARE NOT DISCHARGEABLE UNDER CHAPTER 7:

  1. Tax Liens. If you have tax liens, also known as secured taxes, a Chapter 7 discharge will not remove the liens from your property. A discharge under Chapter 7 will wipe out your personal obligations related to the debt, and will prevent the taxing authority from going after your bank account or wages; however, the lien(s) will still be attached to your affected property. This rule only applies to liens recorded against your property before you file for bankruptcy. In other words, while you may be not be personally liable for the tax debt, you will have to pay the lien from any profits left over when you sell the property.
    That being said, if the lien is based on a dischargeable debt, the debt itself is subject to discharge as outlined above, there may be options to remove the debt.
  2. Recent Property Taxes. If a property tax is incurred before you file for bankruptcy, the tax is nondischargeable. However, this only applies to property taxes last payable within one year of your bankruptcy filing. You can discharge your personal liability for property taxes that were payable (without penalty) more than one year before your bankruptcy filing. Keep in mind, though, that many counties attach a lien to your property upon assessment or one year afterwards. If you have a lien against your property for the property tax, that lien will remain after your Chapter 7 discharge (although your personal liability will be removed).
  3. Third Party “Trust Fund” Taxes. The so called “trust fund” taxes, that is, taxes that a third party is required to collect or withhold, such as FICA, Medicare, and income taxes that an employer must withhold from the pay of employees, and sales taxes paid by the debtor’s customers that the debtor is required to send to a governmental unit, are not discharged under Chapter 7.
  4. Non-punitive Tax Penalties. Non-punitive tax penalties on nondischargeable taxes are not dischargeable in a Chapter 7 bankruptcy if the transaction or event that sparked the penalty occurred less than three years before filing the bankruptcy petition.
  5. Erroneous Tax Refunds. If the IRS made a mistake and erroneously issued you a refund or credit related to nondischargeable taxes, you cannot discharge the IRS’ error.

Share this entry
  • Share on Facebook
  • Share on Twitter
  • Share on LinkedIn
  • Share by Mail
  • Link to Instagram
https://socal.law/wp-content/uploads/2022/02/iStock-637947876-1024x682-1024x585-1.jpg 585 1024 Ajay Gupta https://socal.law/wp-content/uploads/2021/08/gupta-evans-ayres_brand-identity_v4-02.png Ajay Gupta2016-05-09 22:47:002022-02-14 22:35:03Are Taxes Dischargeable in Bankruptcy?
You might also like
Will My State Court Judgment Survive Bankruptcy?
Squatter’s Rights, Prescriptive Easements, and Adverse Possession
Why Speak to an Attorney Before Buying a Home?
Litigation To Sue or Not to Sue?
Legal Real Estate Issues
Security Deposit What Do I Need to Know About My Security Deposit

Search Blogs

Categories

Recent Blogs

  • The First Amendment, Bad Reviews, and You: So You’ve Been Smeared on the Internet – Part IOctober 4, 2022 - 8:49 pm
  • GEA’s Demand Letter to Union Bank Secures Release of Erroneous LoanJune 10, 2022 - 11:43 pm
  • Gupta Evans and Ayres Confirms One of the First Contested Subchapter 5 Bankruptcies in the Southern District of California. In re: Eminent Cycles, LLCJune 10, 2022 - 11:37 pm

Connect

HEADQUARTERS

1620 Fifth Ave #650
San Diego, CA 92101

CONTACT

P: 619-866-3444
F: 619-330-2055
E: info@socal.law

CONNECT

  • Link to Facebook
  • Link to Twitter
  • Link to LinkedIn
  • Link to Instagram
  • Link to Youtube
gupta evans ayres brand identity RGB Vertical White 2
smal bbb Logo
Avvo Small Logo
superlawyers Logo
small userway Logo
SDCBA Logo

© Gupta Evans & Ayres 2022 – all rights reserved

site design by digitalstoryteller.io

1620 Fifth Ave #650
San Diego, CA 92101

P: 619-866-3444
F: 619-330-2055
E: info@socal.law

  • Link to Facebook
  • Link to Twitter
  • Link to LinkedIn
  • Link to Instagram
  • Link to Youtube
gupta evans ayres brand identity RGB Vertical White 2

small userway Logo
smal bbb Logo
Avvo Small Logo
superlawyers Logo
SDCBA Logo

© Gupta Evans & Ayres 2022 – all rights reserved

site design by digitalstoryteller.io

3 Things You Need to Know About Small Claims CourtSmall ClaimsSB 308SB 308 Senate Bill: Proposed Changes to Bankruptcy Exemptions May Benefit Y... Scroll to top

This site uses cookies. By continuing to browse the site, you are agreeing to our use of cookies.

Accept settings

Cookie and Privacy Settings



How we use cookies

We may request cookies to be set on your device. We use cookies to let us know when you visit our websites, how you interact with us, to enrich your user experience, and to customize your relationship with our website.

Click on the different category headings to find out more. You can also change some of your preferences. Note that blocking some types of cookies may impact your experience on our websites and the services we are able to offer.

Essential Website Cookies

These cookies are strictly necessary to provide you with services available through our website and to use some of its features.

Because these cookies are strictly necessary to deliver the website, refusing them will have impact how our site functions. You always can block or delete cookies by changing your browser settings and force blocking all cookies on this website. But this will always prompt you to accept/refuse cookies when revisiting our site.

We fully respect if you want to refuse cookies but to avoid asking you again and again kindly allow us to store a cookie for that. You are free to opt out any time or opt in for other cookies to get a better experience. If you refuse cookies we will remove all set cookies in our domain.

We provide you with a list of stored cookies on your computer in our domain so you can check what we stored. Due to security reasons we are not able to show or modify cookies from other domains. You can check these in your browser security settings.

Google Analytics Cookies

These cookies collect information that is used either in aggregate form to help us understand how our website is being used or how effective our marketing campaigns are, or to help us customize our website and application for you in order to enhance your experience.

If you do not want that we track your visit to our site you can disable tracking in your browser here:

Other external services

We also use different external services like Google Webfonts, Google Maps, and external Video providers. Since these providers may collect personal data like your IP address we allow you to block them here. Please be aware that this might heavily reduce the functionality and appearance of our site. Changes will take effect once you reload the page.

Google Webfont Settings:

Google Map Settings:

Google reCaptcha Settings:

Vimeo and Youtube video embeds:

Other cookies

The following cookies are also needed - You can choose if you want to allow them:

Privacy Policy

You can read about our cookies and privacy settings in detail on our Privacy Policy Page.

Accept settingsHide notification only