Many taxpayers are mistaken in their belief that taxes are not dischargeable under bankruptcy law. There are various possibilities to discharge tax liabilities through bankruptcy. Chapter 7 and Chapter 13 are very powerful tools.
Like the IRS Offers in Compromise program, the Bankruptcy Code allows taxpayers in some instances “a fresh start” by discharging old income tax obligations. Bankruptcy may offer the chance for discharging income tax liabilities in full in a Chapter 7 action, or taxpayers can make monthly payments on IRS debt not discharged in a Chapter 13 action, often stopping the interest and penalties from accruing.
Major bankruptcy reform has occurred recently, aimed at correcting unbridled consumer debt relief. The bankruptcy reform legislation was placed on the legislative backburner in the wake of the recent terrorist attacks on New York City and Washington, D.C., according to Congress Daily. For many taxpayers, the IRS Offer in Compromise program may become more attractive.
Generally, personal income taxes may be discharged when the taxes are at least three years old, were assessed at least 240 days prior to the bankruptcy filing, and were voluntarily filed at least two years ago. If you are considering filing bankruptcy, and the IRS has filed a substituted return on your behalf (SFR), it is advisable to consult an attorney prior to filing your original returns.
Non dischargeable taxes in Chapter 7 bankruptcy filing include:
Income taxes less than three years old
Taxes filed less than two years ago
Taxes assessed less than 240 days ago