When trying to understand how your tax debts may be handled in a consumer bankruptcy case, you must not worry about how much debt you are in, but more about what type of debt you have. In short, some may be dischargeable, while others are non-dischargeable. With this, you may deeply reflect on whether a bankruptcy filing is worth it, considering things like whether the majority of your other debts are also non-dischargeable. Also, thinking about whether you necessarily need bankruptcy protection from the Internal Revenue Service (IRS), depending on whether they are levying your wages or offering you a payment plan. Well, please follow along to find out which taxes are dischargeable versus non-dischargeable at the end of a bankruptcy case, and how a proficient Louisville, Kentucky consumer bankruptcy lawyer at Schwartz Bankruptcy Law Center can help you learn what kind of financial relief to expect.

What types of taxes are dischargeable and non-dischargeable in a bankruptcy case?

In a consumer bankruptcy case, federal and state income taxes are the most common type of tax debt that may be dischargeable. However, this is only if they satisfy the strict timing restraints imposed by what is known as the 3-2-240 rule. The specific requirements for this rule are as follows:

  1. The 3-year rule: your tax debt must relate to a return due at least three years before you filed for bankruptcy.
  2. The 2-year rule: your tax return must have been filed at least two years before you filed for bankruptcy.
  3. The 240-day rule: the IRS must have assessed your tax at least 240 days before you filed for bankruptcy.

In contrast, payroll taxes are generally deemed non-dischargeable debts, especially trust fund taxes withheld from employees’ paychecks for income tax, Social Security, and Medicare. Then, property taxes may only be dischargeable under certain circumstances, such as depending on how recently they were assessed, whether the IRS has already secured rights to the property, etc.

Can penalties and interest on tax debt be discharged in bankruptcy, too?

Of note, in an effort to get you to start paying off your tax debt, the IRS may have initiated collection activities such as penalizing you or imposing interest. Well, when the tax debt itself was discharged at the end of your bankruptcy case, the attached interest may follow suit.

However, the resolution for associated penalties may not be as absolute. This may largely depend on the reason for the IRS penalizing you. For example, if it was because you were caught committing fraudlant conduct or willful tax evasion, these penalties may become non-dischargeable.

You probably have more questions regarding this topic, and we would be happy to answer them for you. So please schedule an initial consultation with a talented Louisville, Kentucky consumer bankruptcy lawyer from Schwartz Bankruptcy Law Center. We look forward to our conversation with you.