Can You Erase Income Tax Debt in Bankruptcy?

August 1, 2019 | By Steffens Law Office
Can You Erase Income Tax Debt in Bankruptcy?

Erasing Debt Paying taxes is often painful, but owing taxes that you’re unable to pay can be intolerable. Luckily, income tax debt can sometimes be erased in a bankruptcy filing.

Erasing Tax Debt

In a Chapter 13 bankruptcy, income tax debt is included in your debt repayment plan. In some cases, the tax debt can be reduced to make payments more manageable.

Income tax debt can only be erased in a Chapter 7 bankruptcy under specific conditions.

  • Payroll taxes and fraud penalties can never be eliminated in bankruptcy. 
  • The income tax must have been due over 3 years before the bankruptcy was filed. 
  • The tax return must have been filed at least 2 years prior to filing the bankruptcy. 
  • The tax had been assessed by the IRS for at least 240 days before the bankruptcy is filed. 
  • The taxpayer must not have engaged in fraud or a willful attempt to evade or defeat the tax. 

As you can see, as long as the bankruptcy is not filed too soon after the tax return is filed, income taxes can be discharged. This is known as the Gallo Rule: Just as Ernest and Julio Gallo advertise that they will sell no wine before its time, the debtor owing income tax debt should wait for the right time to file the bankruptcy.

If you can’t remember when you filed your tax return, there's no need to worry.  This information can be obtained from a tax transcript by filing IRS Form 4506 and Nebraska Tax Form 23.

You will need to provide a copy of your most recent tax return with your bankruptcy petition and provide proof that your last four years of returns have been filed before your bankruptcy can be granted. 

Priority Debts

Taxes are generally considered priority debts in a Chapter 7 bankruptcy. If assets are liquidated, priority debts are repaid first. 

Federal Tax Liens

Even if you qualify for a discharge under Chapter 7 bankruptcy rules, you can't discharge a federal tax lien. The IRS can't go after your wages or bank account, but they can keep a tax lien on your home or other property as long as the lien occurred before you filed for bankruptcy. 

Contact Steffens Law Offices Today

Discharging income taxes in bankruptcy can be a tricky matter. Traps await to surprise the inexperienced.  If you have any questions, contact the lawyers and staff at Steffens Law Offices to schedule a consultation. Call us today at (308) 872-8327. We’re dedicated to helping you achieve a fresh financial start.