Can You Discharge Tax Debts In A Chapter 7 Bankruptcy?
For many Jacksonville residents, their biggest source of debt is what they owe the Internal Revenue Service. Florida may not have a state income tax, but most people still have to pay federal taxes on their income. And it is not uncommon for people to fall behind on their taxes, especially if they are self-employed or have had an irregular income over the past few years.
There is a misconception that you can never discharge tax debts by filing for Chapter 7 bankruptcy. That is not the case. Indeed, it is possible to get rid of tax debts in bankruptcy under certain conditions. And even in cases where a tax debt cannot be discharged, filing for bankruptcy can still buy you some time and temporarily suspend any IRS collection activities.
The Rules for Getting Rid of Income Tax Debts in Bankruptcy
In a Chapter 7 bankruptcy, a debtor is normally able to liquidate their debts and obtain a discharge, which effectively grants them a “fresh start.” Federal law dictates what debts can and cannot be discharged. With respect to tax debts, a discharge is allowed if the debtor can meet all of the following requirements:
- Only income taxes can be discharged. You cannot discharge other tax debts, such as FICA taxes that you withhold as an employer.
- The income taxes were due at least 3 years before the debtor filed for bankruptcy. In other words, if you file for bankruptcy in 2023, then you can only seek discharge of income taxes that were disclosed in a tax return that was due before 2020.
- A tax return for the income tax debt must have actually been filed within 2 years of filing for bankruptcy. You cannot discharge a tax debt if you never filed a return in the first place.
- The actual income tax was assessed at least 240 days before filing for bankruptcy. This rule generally applies in cases where the debtor has been the subject of an IRS audit.
It is important to understand, however, that even if income tax debts are discharged in a Chapter 7 case, that does not wipe out any tax liens recorded by the IRS prior to the bankruptcy filing. This means the IRS could still seize your assets post-bankruptcy if such a lien exists. But these liens typically apply only to real estate and certain pension plans, so if you have neither of those assets, the lien is likely of little practical concern.
Contact Jacksonville Bankruptcy Lawyer Carol M. Galloway Today
Even if your tax debt cannot be discharged in Chapter 7 for some reason, simply filing for bankruptcy still triggers an “automatic stay” that prevents the IRS from initiating or continuing any collection proceedings while your case remains pending. This can buy you valuable time as you work to discharge your other debts. An experienced Jacksonville Chapter 7 bankruptcy lawyer can further advise you in this area. If you are thinking about filing for bankruptcy and need advice, contact the Law Offices of Carol M. Galloway, P.A., today to schedule a free consultation.