Chapter 7 bankruptcy is a tool that offers debtors a chance to wipe out certain debts. Certain debts, such as taxes, are not discharged under Chapter 7.
Depending on your tax type, a Chapter 7 bankruptcy may discharge your tax debt.
If you meet specific requirements, you can get a discharge of any federal and state income taxes you owe in Chapter 7. The first requirement is that you file the tax return. A taxing authority may assess liability against you if you do not file a return. You cannot discharge the liability if you did not file the return.
The discharge is only available for taxes due three years or more before filing bankruptcy. You must also file the tax return at least two years before the bankruptcy filing. If the taxing authority audits your return and assesses the additional tax, you must wait 240 days before filing bankruptcy to discharge any other amounts assessed.
If you withhold taxes from others, such as employees, for payroll tax, you can never discharge these taxes if you do not pay the liability owed to the taxing authority. Other types of withheld taxes include sales and meal tax.
You can discharge penalties associated with taxes if the penalty is more than three years old. You cannot discharge a penalty assessed by the taxing authority for fraud.
If you file for a Chapter 7 bankruptcy, you want to maximize the debt you can discharge. Make sure to know the requirements for discharging your obligations.