Did you know that bankruptcy can eliminate your old tax debts? Tax debts for tax years where the tax return was due at least 3 years before the bankruptcy case is filed can be eliminated as long as you filed your tax return for those taxes at least 2 years before filing bankruptcy!
Generally, taxes owed are categorized as “priority” debts in bankruptcy. With the exception of the penalty portion of the debt, a chapter 7 bankruptcy has no effect on these tax debts and you would still owe them after the bankruptcy case is closed. In chapter 13 bankruptcy, tax debts must be paid in full over the 3-5 year term of your chapter 13 plan, again with the exception of the penalty portion.
However, if your tax return for a tax debt was due at least 3 years before you file your bankruptcy case, that tax debt is not categorized as a priority debt. In a chapter 7 case, these tax debts would be discharged. In a chapter 13 case, the debt would become a general unsecured debt, just like credit card or medical debt, and would not usually have to be paid in full, or possibly at all.
If you got an extension for filing your tax return, that extension becomes the date from which the 3 years is counted. So, if you owe taxes for 2013 income and filed your 2013 tax return on time, you could eliminate those taxes if you were to file bankruptcy anytime after April 15, 2017, because your return was due April 15, 2014. If you got an extension for 2014, you would need to wait until October 15, 2017 to file your bankruptcy case in order to get these taxes eliminated. If you did not get an extension but did not file your taxes on time, April 15 is the date that would be used. Remember that regardless of whether you got an extension for filing your tax return, you must have filed it at least 2 years before filing your bankruptcy case in order to eliminate these taxes in bankruptcy.
There is one exception to this rule: If the IRS or California Franchise Tax Board records a lien against you for a tax debt before you file bankruptcy, you may not eliminate your tax debt by filing bankruptcy. This is another of many reasons that you should not delay dealing with your debts.
If you have substantial tax and/or other debt that you cannot afford to pay, contact a bankruptcy attorney today. Don’t delay dealing with tax debts until a lien is filed against you and you lose your ability to get rid of old taxes in bankruptcy.