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Bankruptcy Discharge of Federal Income Taxes

The United States Bankruptcy Code ("Code") provides for the discharge of federal income tax obligations in certain, limited situations. While there are numerous restrictions on bankruptcy discharge of such taxes, one is of particluar importance: timing.

Individual Bankruptcy

Individuals are generally permitted to file for discharge through bankruptcy under two chapters of the Code: Chapters 7 & 13. Chapter 7 provides for discharge of debts through liquidation while Chapter 13 provides for discharge pursuant to a repayment plan through which some debts are repaid and the others are discharged.

Federal Income Tax Obligations

Although both Chapters 7 & 13 provide for the discharge of qualifying federal income tax obligations, Chapter 13 requires repayment of such obligations.  However, Chapter 13 does avoid the accrual of future penalties and interest.

Timing Requirements

The Code permits discharge of certain older federal income tax debts while it does not permit the discharge of newer federal income tax debts. Federal income taxes are generally not eligible for discharge through liquidation under Chapter 7 or through repayment under Chapter 13 unless the following timing requirements are met:

  1. The debtor's federal income tax return was due, including all extensions, more than three years before the bankruptcy petition filing.
  2. The IRS assessed the tax more than 240 days before the bankruptcy petition filing.
  3. The debtor's federal income tax return was filed more than two years before the bankruptcy petition filing.

11 USC §§ 507(a)(8) & 523(a)(1)(B).

Prior to Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Chapter 13 provided for a "super-discharge" of tax debts for which the debtor did not actually file a tax return, however, that exception has been eliminated and timing requirements are now ostensibly the same as under Chapter 7.

This brief overview of some important considerations associated with bankruptcy and taxes is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.

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