Tax Debt Discharge

The public has two common misconceptions about how tax debts are resolved in bankruptcy cases. One misconception is that you cannot discharge IRS debt under any circumstances. The second misconception is that you can easily eliminate any tax debt through bankruptcy. The truth is, you can eliminate some tax debt through bankruptcy, but only if certain requirements are met.

Under Chapter 7 Bankruptcy, whether tax debt is dischargeable will depend on the type of tax debt and the circumstances under which you are attempting to file. Under Chapter 13, a bankruptcy petitioner will still have to repay tax debt in full.

Attorney for Tax Debt in Dallas, TX

Despite the common misconceptions about tax debt in bankruptcy, an individual attempting to discharge his or her tax debt through the bankruptcy process will want an experienced Texas Bankruptcy attorney to guide them through the complicated steps.

Moreover, consulting with a lawyer will help you determined whether you are eligible to discharge tax debt and save you time and money.

The bankruptcy attorneys in Dallas, TX at Littlefield Law Firm can help you discharge any eligible tax debt under Chapter 7. Our lawyers will advise you and help you file the required petitions.

We will explain the law and assist you in discharging as much debt as possible. We accept cases throughout Dallas County, Texas and in the surrounding areas like Collin County, Rockwell County, and Kaufman County, TX.

Call Littlefield Law Firm at (972) 812-0900 to learn more about how you can discharge your IRS debt.

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Tax Debt Information Center

  1. Is IRS Debt Dischargeable in Bankruptcy?
  2. What Are The Rules of Discharging Tax Debt?
  3. Are IRS Penalties Dischargeable?
  4. What Taxes Are Not Dischargeable?

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Is Tax Debt Dischargeable?

The short answer is yes. Only under very specific circumstances, however, may an individual wipe out tax debt. Under Chapter 7, the following circumstances must exist:

  1. The petitioner did not commit tax fraud, tax evasion, file a fraudulent tax return, or use any method to willfully attempt to avoid paying taxes;
  2. The petitioner’s tax debt must have been due at least three (3) years prior to he or she filing bankruptcy;
  3. The petitioner must have filed a tax return for the debt that he or she is attempting to discharge at least two years before filing for bankruptcy;
  4. The petitioner’s income tax debt must have been assessed at least 240 days before he or she filed for bankruptcy; and
  5. The taxes must be income taxes.

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The Rules of Discharging Taxes in Bankruptcy

Although tax debts are dischargeable in bankruptcy, the Bankruptcy Code outlines specific time periods that determine how old a tax debt must be, when the petitioner must have filed the bankruptcy relative to the tax debt, and when the IRS must have assessed the debt.

To discharge back income taxes, the taxes must be at least three years old at the time of bankruptcy, and two years must have passed before the individual filed the required tax forms for the debt and 240 days since the IRS assessed the tax debt.

This rule is called the “3-2-240 Rule,” and each of the individual rules is found separately in the Bankruptcy Code.

The Three (3) Year Rule

Bankruptcy Code § 507(a)(8)(A), states that it allows the unsecured claims of governmental entities to be discharged, only to the extent that those claims are, “a tax on income that is measured by gross receipts for a taxable year ending on or before the date the date of the filing of the petition.” Therefore, a bankruptcy petitioner attempting to discharge his or her income tax must have become due at least three years prior to filing.

Importantly, if an individual receives an extension of his or her time to file taxes, then the three year period will run from the time that the taxes were due under the extension.

The Two (2) Year Rule

The two-year portion of the 3-3-240 rule is found in U.S. Bankruptcy Code § 523(a)(1)(b)(ii). The Two-Year Rule states, that a discharge… “does not discharge an individual debtor from any debt for a tax… with respect to which a return, or equivalent report or notice, if required, was filed or given after the date on which such return…was last due, under applicable law or any extension, and after two years before the date of the filing of the petition…."

Essentially, the Two-Year Rule requires that a person's tax return must have been filed at least two years before he or she files for bankruptcy.

The 240-Day Rule

The 240-Day rule is found under the Bankruptcy Code § 507(a)(8)(A)(ii). The unsecured claims of governmental units may be discharged… “only to the extent that such claims are for a tax measured by income…[that have been] assessed within 240 days before the date of the filing of the petition, except:

  • any time during which an offer in compromise with respect to that tax was pending or in effect during that 240 day period, plus 30 days; and
  • any time during which a stay of proceedings against collections was in effect in a prior case under this title during that 240 day period, plus 90 days.”

Lastly, in order to discharge taxes in Texas, the individual's taxes must have been assessed at least 240 days prior to filing, or must not have been assessed at all.

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Are IRS Penalties Dischargeable?

Essentially, both taxes and the penalties and interest associated with a failure to pay taxes are dischargeable in bankruptcy. Similar to discharging taxes, whether an individual can discharge a penalty will depend on the circumstances.

The following debt penalties and interests are dischargeable:

  • Penalties and interest on priority debt in Chapter 13;
  • Penalties from back taxes; and
  • Penalties on interest on back taxes.

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Taxes that Are Not Dischargeable

Not all types of taxes are dischargeable in bankruptcy. Understanding which types of taxes and under what circumstances are taxes not dischargeable is just as important as understanding when they are.

Unfortunately, there are a lot of IRS debts that do not qualify for discharge under Bankruptcy.

  • Tax Liens
  • Property Taxes
  • Trust Fund Taxes
  • Excise and Custom Taxes

Call Littlefield Law Firm at (972) 812-0900 to learn more about the types of IRS debt that are dischargeable in bankruptcy.

Additional Resources

Bankruptcy Discharge of Tax Debts Navigating the Minefield – visit the American Bankruptcy Institute, the nation’s largest bankruptcy professionals’ association, made up of over 12,000 multi-disciplinary professionals. The article discusses the dischargeability of taxes in bankruptcy. In addition, the article talks about the test for determining whether taxes are dischargeable and the procedural considerations.

507 – Priorities - Visit U.S. for the full statutory disposition of Bankruptcy Chapter 507 regarding priorities in bankruptcy. The sections that are specific to taxes outline the 3-2-240 Rule, in addition to those debts that take priority over IRS taxes.

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Find a Bankruptcy Attorney in Dallas County, TX

If you or someone you know is seeking an experienced Texas Bankruptcy attorney who is admitted to federal court in Texas and can adequately represent you in bankruptcy court, contact Littlefield Law Firm.

Linda Littlefield has been practicing law for years and have acquired the knowledge necessary to give strategic advice and zealously advocate for individuals who are seeking a fresh start through bankruptcy.

Questions about what types of debts are dischargeable in bankruptcy, especially taxes, and are not uncommon. Call our office to learn more about how bankruptcy helps you start over. Call (972) 812-0900 now to schedule a consultation.

This article was last updated on Thursday, March 22, 2018.

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