Many people–and that includes some tax professionals–have the mistaken impression that federal income taxes can never be discharged during the bankruptcy process.  Fortunately, though, this common myth isn’t entirely true.  And even in situations where the tax debt can’t be discharged, breathing room can often be obtained for the cash-strapped taxpayer.  By filing a bankruptcy petition, the debtor gains an automatic stay which forces all creditors (including the IRS) to stop all collection attempts, bank account levies, and wage garnishments.  This buys the debtor time to either obtain a discharge or reorganization of his or her tax liabilities.

Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), essentially merging the tax discharge rules applicable to Chapter 7, Chapter 13 and Chapter 11 bankruptcies.  The rules governing possible tax discharge can be as winding as a mountain road, and experienced bankruptcy attorneys are likely the best qualified to advise a taxpayer how they apply to the specific facts and circumstances of a case.  A general rule of thumb (but by no means always accurate) is that most “old” taxes can be discharged, while “new” tax liabilities are non-dischargeable.

Typically speaking, the Bankruptcy Code allows for discharge of tax debt when the following requirements are met:

* the tax return was filed more than two years before the bankruptcy filing;

* the tax return was due more than three years before the bankruptcy filing;

* the tax liability was assessed more than 240 days before the bankruptcy filing;

* the taxpayer did not file a fraudulent tax return or engage in tax fraud or evasion; and

* a tax return was actually filed for the delinquent tax liability.

To put it more succinctly, bankruptcy discharge of a personal income tax liability will depend upon the lapse of various time periods from the due date of the tax return, the actual filing date of the return, and the tax assessment date, up to the date the taxpayer filed a bankruptcy petition.  One way to think of these time periods is that they are separate statutes of limitations that expire at different time frames.  Upon the expiration of all the “statutes of limitations”, a tax liability becomes a dischargeable “non-priority tax” versus a formerly “priority tax”.

In situations where the government has filed a Notice of Federal Tax Lien against the taxpayer’s property, things can get even more complicated.  A filed Federal Tax Lien attaches to a taxpayer’s real and personal property–all of it–and must be considered when taking into account possible delinquent tax solutions like filing for bankruptcy.  The complex interplay of delinquent federal tax liabilities, a filed tax lien and bankruptcy makes an already complicated area of law even more complicated thanks to certain provisions contained in the BAPCPA.  Those who have had federal tax liens filed against them should immediately consult with knowledgeable tax and legal counsel.