Certain taxes, such as payroll taxes or trust taxes, are not dischargeable. Federal income taxes may be dischargeable depending on a number of factors. Generally, in order for taxes to be dischargeable:
- The tax return must have been due more than three years from the filing of the bankruptcy petition. This includes extensions, so if you had an extension of the due date to October 15, as many people do, the due date would be October, rather than April.
- The tax return must have been filed more than two years before the bankruptcy was filed. Sometimes, if you don’t file a tax return, the IRS files one for you. This may not count as a tax return filed.
- The tax must have been assessed more than 240 days before the petition was filed.
While a tax may be dischargeable if the IRS has filed a valid lien, the tax may be dischargable if it meets 1 – 3 above, but the IRS may still have a lien against your real and personal property. If the IRS has a lien, you may use a Chapter 13 bankruptcy to pay secured amount, or you may use a Chapter 7 to discharge the taxes as to your personal liability, but you will have to still address the IRS lien.
Are interest and penalties dischargeable?
As a general rule, if the tax is dischargeable, so are the penalties and interest. One advantage of using bankruptcy to resolve tax issues is that with respect to taxes secured by a lien, penalty and interest stops accruing once you file. Unsecured priority taxes (taxes that are not secured by a lien; and don’t meet 1-3 above) no longer accrue penalties, but interest continues to run at the rate of interest in effect at the time the petition was filed.