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Can I discharge tax debt in bankruptcy?

On Behalf of | Jun 4, 2024 | Tax |

You may wonder if you can use bankruptcy to discharge tax debt that you cannot pay. Unfortunately, tax debt is generally not dischargeable in bankruptcy, with some exceptions.

One factor in determining if your tax debt can be discharged is the type of bankruptcy you file. You might be able to discharge your tax debt in a Chapter 7 bankruptcy but cannot in a Chapter 13 bankruptcy.

Chapter 7 bankruptcy involves a discharge of all your qualifying debts, while Chapter 13 involves a three to five-year payment plan. In a Chapter 13 bankruptcy, your tax debt is likely to be included in the payment plan.

Chapter 7 requirements

If you are filing a Chapter 7 bankruptcy, the only type of debt you can potentially discharge is federal or state income tax debt. Payroll taxes or fraud penalties cannot be discharged. The debt must be a regular tax payment owed to either the federal government or the state of Texas.

Additionally, the debt must be at least three years old. The original tax return must have been due at least three years ago to qualify for bankruptcy. For example, if you file for bankruptcy in April 2024, the tax debt that could be discharged would be for your 2021 taxes that were April 15, 2022.

You must show that you did not purposely evade paying taxes or file a fraudulent claim. Your actions in filing the tax return must have been lawful.

Fraud, mistake or undue hardship

Your tax debt could also be forgiven if you show the debt is the result of fraud or mistake or if you can demonstrate undue hardship. These can be challenging to prove.

In a case involving undue hardship, you typically must provide written documentation describing why it would be difficult or impossible for you to pay the tax debt. However, if your undue hardship claim is denied, you could potentially take advantage of other options, such as setting up a payment plan with the IRS to pay the debt off over time.