Using Chapter 13 to Deal With Overdue Taxes

Can IRS debt be discharged in chapter 13?

The general rule in bankruptcy is that tax debts are not dischargeable. While a Chapter 13 repayment plan can stagger repayment of taxes over a three- to five-year period, it cannot wipe out all tax debts. However, there are exceptions. The test for dischargeability is whether a tax debt is deemed priority or nonpriority in nature.

Priority tax debts

Priority tax debts are not dischargeable. They include recent income tax debts, property taxes incurred one year prior to your bankruptcy filing, taxes that were required to be withheld (like payroll taxes) and tax penalties on nondischargeable taxes.

Non-priority tax debts

In order for income tax debts to be considered nonpriority and thus dischargeable, they must meet the following criteria:

1. The due date for the tax return was at least three years before the bankruptcy filing.
2. The tax return was filed at least two years ago.
3. The tax assessment by the IRS was made at least 240 days ago.

You should note that bankruptcy courts strictly adhere to these filing dates in Chapter 13 cases. Discharges have been denied due to only a few days’ discrepancy between the tax return filing date and the bankruptcy petition filing.

Discharges have also been denied if the court sees evidence of fraudulent conduct, like filing false or incomplete returns, or tax evasion, such as hiding assets or making suspicious payments or transfers.

A tax debt that qualifies as nonpriority may be included in your Chapter 13 repayment plan. Any portion of those taxes not paid off during the life of the plan can thereafter be discharged. Payments of priority taxes may also be included, but these must be completely paid off during the plan period.

Note, however, that if a tax lien has been placed on any of your property and the related tax debt has been discharged, that does not dissolve the lien. You will have to settle that lien before you sell the property or else pay off the lien with sale proceeds.

Owing taxes while in Chapter 13

If you are carrying tax debts and are considering filing for Chapter 13 bankruptcy, you should consult an experienced bankruptcy attorney to see if any of those debts are dischargeable. From offices conveniently located in Athens, Douglasville, Gainesville, Lawrenceville, Marietta and Scottdale, Jeff Field & Associates is able to help people in bankruptcy matters throughout the Atlanta metropolitan area and beyond. To schedule an appointment call 404-381-1278 or contact us online.