The short answer is it depends. Although the purpose of the bankruptcy system is to give a debtor a discharge of the debts it is unable to pay and to give that debtor a fresh start – in many cases, that debtor is still liable for tax debt even after filing for bankruptcy.
The term “discharged” simply means that the debt is cancelled. Whether you can discharge tax debt depends on the type of tax owed, how old the tax is, if a return was filed, the type of bankruptcy you have filed for, etc. Generally, a debtor is more likely to have tax debt discharged in a Chapter 7 bankruptcy than in a Chapter 13 bankruptcy. Despite this fact, the criteria for qualifying for discharge of federal income taxes in a Chapter 7 is extensive and complex. Meaning you must still meet a laundry list of conditions prior to your tax debt becoming eligible for discharge.
Notice the emphasis on the discharge of federal income taxes. This is because many types of tax debts are not eligible for discharge. The following types of tax debts are not discharged in a Chapter 7 bankruptcy: tax penalties from the tax debt that is not eligible for discharge, tax debts from unfiled tax returns, and trust fund taxes or withholding taxes withheld from your paycheck by your employer.
The result of being eligible for discharge of tax debts is that you will no longer be responsible for paying the taxes and the IRS may not take any action in efforts to collect that tax from you. However, even if you are unable to discharge tax debt, you still may consider other arrangements. Options that may be available to you include entering into an installment agreement with the IRS or even making the IRS an offer in compromise. If the IRS accepts your offer in compromise, it will result in a settlement of the tax debt for less than the amount owed.
A fresh start as it relates to tax debt is complicated. Need help navigating through your tax debt endeavors? Contact our office today to see how Bryson Law Firm, LLC may be able to assist you.