Tax Debt

Tax Attorneys in Atlanta, Georgia Are Taxes Dischargeable in Bankruptcy?

Past due income taxes to the IRS and Georgia Department of Revenue may be wiped out in bankruptcy in certain situations.  If the IRS or Georgia Department of Revenue has levied your wages or filed a lien against your property for past due tax debt, you may wonder whether the tax debt is dischargeable in bankruptcy. There is much confusion as to whether tax debt is dischargeable in bankruptcy. As a general rule, IRS tax debt is not dischargeable in bankruptcy. The truth is that bankruptcy may wipe out your tax debt, depending on how old the tax debt is.

Three Year Rule for Dischargeability of Tax Debt in Bankruptcy

The general rule for the dischargeability of tax debt in bankruptcy is that if the tax debt is more than three years old, it is normally dischargeable. However, the three year rule is subject to rules and exceptions. The tax debt must be income tax debt in order to be dischargeable. 

Timely Filing Required to Discharge Tax Debt in Bankruptcy

Further, you must have timely filed the tax return for the year in question in order for the tax liability to be dischargeable in bankruptcy. For example, if you are seeking to discharge a 2006 income tax liability, you must have timely filed the tax return by April 15, 2007. The three year rule is calculated from the due date. Thus, a timely filed 2006 tax return would render the tax liability dischargeable in bankruptcy if the bankruptcy petition is filed after April 15, 2010, or three years from the April 15, 2007 due date. 

Exceptions Apply to Discharging Tax Debt in Bankruptcy

Further, there are additional rules related to whether you have made an offer in compromise to settle the tax debt or if tax liability was assessed after you filed the return. If you filed your tax return late, then the tax debt is not dischargeable until at least two years after you filed the return, if the tax return was due more than three years before the date of filing the bankruptcy petition. Even though filing bankruptcy can discharge old income tax debts, any tax liens will remain. The IRS can choose to exercise its right under the liens if you have any equity in any property.

The Difference Between Chapter 7 and Chapter 13 Bankruptcy

Tax debt is also treated differently depending on whether you are filing a Chapter 7 or a Chapter 13. In a Chapter 7, a dischargeable tax debt is discharged when the court issues an order discharging all debts. 

Tax Debt in Chapter 13 Bankruptcy

In a Chapter 13, dischargeable tax debt drops from a “priority debt” status to an “unsecured nonpriority” debt status. This means that if you are in a Chapter 13, then nondischargeable priority tax debt must be paid. However, dischargeable tax debt is considered nonpriority and does not necessarily get paid back at 100%. For example, if your Chapter 13 plan only proposes to pay back 25% of unsecured, nonpriority debts (such as credit cards, medical bills, or dischargeable tax liabilities), then you will only pay back 25% of the nonpriority tax debts. As discussed in the Chapter 13 section of this website, the percentage of unsecured nonpriority debts that you have to pay back depends on factors such as your disposable income and whether you have filed bankruptcy in the past. 

Free Consultation with Atlanta Bankruptcy Attorney

Due to the complexity of tax debt and bankruptcy, you should consult an attorney to advise you as to the best course of action to address tax debt. If you have any further questions about tax debts in Georgia, please call Law Offices of Charles Clapp at (404) 585-0040 or contact us on the web for a free consultation with an attorney.