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Will your tax debt be discharged under a Chapter 7 bankruptcy?

A Chapter 7 bankruptcy is designed to give the debtor a fresh start by discharging most debt. Tax debt under a bankruptcy is very complex. Sometimes, it can be discharged, but it depends on multiple factors, such as the type of tax, whether the debtor filed a return and the type of bankruptcy. For example, payroll taxes or penalties for fraud are not generally dischargeable. 

The IRS lists six considerations for discharging federal tax debt under a Chapter 7 bankruptcy. A taxpayer must meet all of the following conditions: 

  • The debt must be for federal income taxes
  • The debtor must have filed a legitimate tax return for two years before the bankruptcy
  • The tax debt must be at least 3 years old
  • The IRS must have assessed the tax debt at least 240 days before the bankruptcy filing
  • The debtor did not willfully evade taxes
  • The debtor committed no deliberate tax fraud, i.e., the tax debt cannot be due to an intention to defraud the IRS 

If the IRS has placed a lien on the debtor’s property, this must be handled separately from the discharge. The discharge of the debt in itself is not typically enough to clear the title. You may have to pay off the lien in order to clear the title. The IRS may also forgive tax penalties on debt that can be discharged, but any penalties on tax debt that cannot be forgiven are not dischargeable. 

When it comes to tax debt and bankruptcy, it is a good idea to talk to an experienced attorney who can help you find the best possible outcome for relief. The IRS does have other arrangements if the debt is not dischargeable. It makes sense to explore all options before assuming you can or cannot discharge your debt. A case review of your situation can give you a better idea of what to expect through the bankruptcy filing and how the process will affect your debt. 

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