Having a large tax debt can make you feel both frightened and overwhelmed that your bank account will be drained by the IRS. Then, someone suggests that if you file bankruptcy that will eliminate the tax debt. It this true? Will filing a chapter 7 bankruptcy eliminate your tax debt?
Certain IRS debts may be dischargeable in bankruptcy. To qualify for discharge under Chapter 7 or Chapter 11, the tax debt must meet specific criteria:
- Age of Debt: The tax debt must be at least three years old.
- Filing Date: You must have filed a tax return for the debt at least two years before filing for bankruptcy.
- Assessment Date: The IRS must have assessed the tax debt at least 240 days before you file for bankruptcy.
- No Fraud or Evasion: The tax return must not be fraudulent, and you must not be guilty of tax evasion.
If these conditions are met, the tax debt may be discharged, meaning you are no longer legally required to pay it. However, any cancellation of debt (COD) income resulting from the discharge is reportable on the bankruptcy estate's tax return, not your individual return.
It's also important to note that while bankruptcy can provide relief, it doesn't eliminate all tax-related obligations. Consulting with a bankruptcy attorney or tax professional can help you navigate the complexities and determine the best course of action for your specific situation.
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