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Q.Can my overdue taxes be discharged in bankruptcy?
A.Yes and No. Most individuals are unaware that they may be able to discharge some, or all, of their older income tax obligations in bankruptcy. Dischargeability of these taxes turns on whether or not the past due claims are "priority" claims. Tax obligations which are non-priority claims are dischargeable. The Bankruptcy Code provides that taxes assessed by a governmental agency which are based on income (income taxes) lose their priority status when:
- the tax return, with all extensions, was due more than three years before filing for bankruptcy protection; or
- a return was filed at least two years before filing for bankruptcy relief; or
- the tax obligation was assessed at least 8 months before filing; and
- the taxpayer is not guilty of fraudulent conduct or tax evasion and has not signed an offer in compromise or other settlement agreement.
Certain penalties and interest may also be dischargeable. Penalties designed to compensate the IRS for actual loss are NOT dischargeable, but those penalties that are punitive in nature may be dischargeable.
Employment taxes are NOT dischargeable regardless of the age of the tax claim.
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