Americans bring all kinds of debt to bankruptcy court. Some of the more common forms of debt include medical debt, credit card debt, and mortgage debt, but tax debt can also be a significant reason for filing for many debtors.
Tax debt, though, is not necessarily dischargeable in bankruptcy. It isn't that tax debt is non-dischargeable, but rather that the rules for discharge of tax debts are stricter than some other types of debts. For this reason, it is important for debtors to have a clear understanding of the requirements they must meet to take advantage of tax debt discharge. Failure to do so could leave them significant tax debts that may have been dischargeable in the bankruptcy process.
First of all, discharge of tax debts is possible in both Chapter 7 and Chapter 13 bankruptcy, but various tests govern the eligibility of that debt for discharge. Under the due date test, the taxing authority must have assessed the tax at least a certain number of days prior to the bankruptcy filing. The calculation for this date is very specific and must be done properly. Tax debts which are assessed after the bankruptcy filing may not be discharged.
Another requirement for discharge of tax debt is that the debtor must not have made a fraudulent return or a willful attempt to evade or defeat the tax debt. Timely notification of the taxing authority of the pending bankruptcy is also required for discharge, and denial of discharge for certain reasons set forth in federal law may also preclude discharge of tax debt.
Another important aspect of the law in this area is that certain types of tax debt may not be discharged. In our next post, we'll look at this further and highlight the importance of working with an experienced attorney when seeking discharge of tax debts.