Occasionally our clients are strapped with other unsecured debts besides their tax debt and they seek advice on whether or not they should file bankruptcy, believing that a bankruptcy would wipe out everything they owe.
Sometimes it makes sense to file bankruptcy to achieve tax relief, but it is definitely not for everyone. There is a formula used to determine if your tax liabilities may legally be discharged in bankruptcy. Tax debts more than three years old are normally dischargeable, but this is only the general rule. Each tax year must meet a fairly elaborate set of criteria (they are called “eighth priority” taxes by the IRS) otherwise they are not dischargeable in bankruptcy.
In a chapter 7 bankruptcy, besides taxes that are entitled to eighty priority, the following tax liabilities are not subject to discharge:
- taxes for which no return was filed
- taxes for which a fraudulent return was filed
- taxes that the taxpayer willfully attempted to evade
- taxes for which a late return was filed (after 2 years before the bankruptcy)