Can you eliminate tax debt owed to the Internal Revenue Service or State of California Franchise Tax Board or other taxing agencies?

Or, as many often ask:  Are taxes bankruptable?

The answer in many cases is “YES!”

Certain tax obligations are dischargeable or may be  managed in bankruptcy.  The primary relevant factors (see more specifics below) are

  • the age of the taxes (determined by calculating from the date the returns were last DUE to be filed),
  • the date of assessment of the taxes (determined by the taxing agency),
  • the dates you filed your required returns (IF they were filed)
  • and whether you willfully attempted to evade payment of the tax by fraud.

Whether you can discharge (eliminate) these taxes in a bankruptcy case depends on a combination of the above factors (and certain other miscellaneous factors) as well as under what chapter of bankruptcy you file.

Requirements for Discharge of Income Taxes in Bankruptcy:

There are several prerequisites that must be met before any tax can be discharged in bankruptcy.

The minimum requirements for discharging federal or state income taxes are (all of the following must be met):

  1. it has been more than 3 years since the returns were last DUE (including extensions) to be filed,
  2. the returns were timely filed or it has been at least 2 years since the returns were filed,
  3. there was no fraud involved or attempts to evade the tax, AND,
  4. the taxes were not assessed within the last 240 days.

There are many exceptions and events which can extend the above rules, so you should not conclude without having transcripts analyzed by an attorney expert with tax discharge issues that your taxes will or will not be discharged in a case you file.

Even if you cannot get rid of your tax debt fully in a Chapter 7 bankruptcy case, you may be able to discharge some of it, and enter into a more favorable repayment plan for the taxes than you otherwise could outside of bankruptcy in a Chapter 13 or Chapter 11 case.

Discharging California Sales Tax and Other Taxes

Similarly, sometimes sales taxes and other taxes, such as those owed to the State Franchise Tax Board, or Board of Equalization, or Employment Development Department may also be dealt with in a bankruptcy case.

In California, discharging sales tax liability requires the same elements listed above for income taxes.  But the key with sales taxes is that the business that generated the liability must be closed so that no new sales tax liability can be assessed.

Generally, if the business has been closed for more than a year–and proper documentation of the closing has been sent to the California State Board of Equalization–then if the other criteria are met, then the sales taxes should be dischargeable.

Don’t Try This At Home

Bankruptcy tax debt analysis is extremely tricky and the only way to correctly determine if taxes are dischargeable in your case is to have a bankruptcy attorney with specialized knowledge analyze your situation.   This will include obtaining an official “literal” tax transcript (also called a “record of account”) from the taxing agency.

The most important thing to do if you are having tax problems is to investigate bankruptcy as a possible alternative to dealing with your taxes.  This is particularly true if it has been more than three (3) years since the tax returns for the years you owe were last due to be filed.

For more information on California Taxes visit the California Tax Service Center.

For other dischargeable debts, please see my bankruptcy discharge page.

by, Mark Markus

Summary
Article Name
How To Get Rid of Taxes in Bankruptcy
Author
Description
When can taxes be eliminated (discharged) in bankruptcy? You can get rid of different kinds of taxes if certain criteria are met.