As a general rule, you cannot discharge back taxes in bankruptcy. Certain income taxes, however, can be discharged under limited circumstances.

When filing for Chapter 7 bankruptcy protection, taxes can be discharged under the following circumstances: (1) the taxes are limited to taxes on income. Taxes levied for fraud, payroll taxes or sales taxes do not qualify as dischargeable; (2) the tax debt must be at least three years old at the time of filing the bankruptcy petition (11 U.S.C. § 507(a)(8)(A)(i)); (3) you must have filed a tax return for the debt at least two years prior to the filing the petition (See 11 U.S.C. § 523(a)(1)(B)); (4) you must have received notice of the tax assessment from the IRS at least 240 days prior to filing the bankruptcy petition (11 U.S.C. § 507(a)(8)(A)(ii)); and (5) the taxes cannot be subject to a tax lien. A chapter 7 discharge of back taxes eliminates a debtor’s personal obligation to a debt, however, if the IRS recorded a tax lien on real or personal property prior to the date the petition was filed, the lien remains on the property. As with any legally obtained lien, the tax lien will need to be paid before the asset can be sold.

Whether or not taxes can be discharged is a complicated area of the bankruptcy law as certain events will toll the possible discharge of a tax such as prior bankruptcy filings, filing extensions, tax litigation and offers to compromise. If taxes are a reason you are considering filing for bankruptcy protection, you should consult a knowledgeable IRS tax attorney for assistance before proceeding.

- Richard V. Stokan, Jr.