Does Bankruptcy Void Tax Debts?

Bankruptcy allows a debtor to get a fresh start by ‘discharging’ some of their debts including those owed to the IRS. But there are lots of exceptions. Here are some of the general rules for you to discuss with your attorney if this is a path you are considering:

  • 100% penalties (trust funds) assessed on a responsible party for failure to pay the payroll taxes of a business are not dischargeable.
  • Tax debts due to income tax returns are dischargeable provided that the due date of the return was at least 3 years before the bankruptcy filing date and the return was actually filed at least 2 years ago. Tax fraud negates this rule as does a conviction for tax evasion.
  • Tax liens filed against property that were filed prior to the bankruptcy petition date remain in place and are enforceable.
  • The Statute of Limitations is automatically tolled (put on hold) for the period of the bankruptcy estate plus 6 months.
  • The IRS is not allowed to continue collection processes while the bankruptcy estate is in existence.

There was recent good news for people in the 11th Circuit of the Court of Appeals which includes Florida. The court held that income tax returns that were filed late are still eligible for discharge provided they were filed at least 2 years ago.  The 1st Circuit in Massachusetts holds a contrary position that any late filed returns are never dischargeable. Too bad for the people in the Northeast.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.

Author: Jim Payne

Jim Payne, a Florida Certified Public Accountant (CPA) since 1976, offers candid insights on getting square with the IRS — with the least pain, and at the lowest cost — with (or without) the help of a tax representative. Mr. Payne is a former IRS agent and expert in business profitability, IRS audits, IRS payroll tax, and IRS non-filer issues. As a Tax Representative, his goal is clear: " I will speak on your behalf to all IRS agents, so you never have to, and I'll guide you in executing a strategy to resolve your IRS problem so you can get back to enjoying life."

Leave a Reply

Your email address will not be published.