Bankruptcy can in certain circumstances, wipe out tax liability.
Chapter 7 bankruptcy will only discharge income tax liability. Therefore, gift, sales, estate, and self-employment taxes are not dischargeable.
For the income tax to be dischargeable in a Chapter 7 case, the most recent due date for filing your tax return for the tax in question must be more than 3 years old. For example, identify the year the income taxes accrued. Perhaps they accrued for income in 2010. Usually, the most recent due date for filing a return is April 15 of the following year. So, the most recent due date to file a return for income tax owed for 2010 is probably April 15, 2011. This date must be more than 3 years from the date you file your bankruptcy case. However, any extensions that you filed with the IRS or state taxing authority will extend this 3 year period.
To have your income tax discharged, you must also have filed a tax return for each tax year which you have back income taxes, at least more than 2 years prior to filing bankruptcy.
The IRS must also have “assessed” the tax at least 240 days prior to the date you file your bankruptcy case. Assessed generally refers to when you are told you owe the income tax.
Although a Chapter 7 can discharge taxes if the above requirements are met, if a tax lien been recorded against your property, the bankruptcy will not remove the lien. The tax lien will remain in place against the property after the bankruptcy, allowing the tax authority to foreclose on your property, or even take the assets in a retirement plan that is safe from other creditors.
Call Jeffrey R. Siegel, your Kansas City tax attorney at (913) 735-4829.