Q: What kind of back taxes and IRS debt are dischargeable in bankruptcy?

A: The IRS does not like to discuss the role of bankruptcy protection to discharge, or remove, back taxes and IRS debt liabilities and provide permanent tax relief. Depending upon the bankruptcy chapter a taxpayer is in-7 or 13-certain types of debts, including interest and penalties on IRS back taxes, may be discharged, or excused, by the bankruptcy court.

Personal income taxes are the only tax debts that may be discharged in bankruptcy. Tax debt from unpaid payroll taxes and federal excise taxes-so-called "trust" taxes that are collected by employers on behalf of the IRS-are never dischargeable. Tax debt from unpaid personal income tax must meet a five-requirement threshold before they can be considered for IRS discharge in bankruptcy:

(1) The tax filing due date must be at least three years, including extensions, prior to the bankruptcy filing.

(2) The tax return, even if filed late, must have been on file for at least two years before the bankruptcy filing.

(3) The IRS tax assessment, which could have come from an IRS audit, a reported balance due, or a proposed assessment that has finalized, must have been completed more than 240 days before the bankruptcy filing. Note that certain events can "toll," or suspend, the 240-day time period.

(4) The tax return cannot have been deemed fraudulent.

(5) The taxpayer cannot willfully have tried to evade taxes.

Be aware that there is no discharge of income taxes if the taxpayer has not filed a return, even if the IRS assessed the tax based on a "substitute for return" filed by the IRS based on a taxpayer?s W-2 and 1099 data.

A taxpayer contemplating IRS tax relief from bankruptcy as a means to discharge personal income tax debt should not rely solely on a bankruptcy attorney for guidance. Consulting with an experienced tax attorney or Certified Tax Resolution Specialist is the only way to determine if the debt is dischargeable, and it may be so without the drastic measure of filing for bankruptcy.

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