By Tommy Brown

Bankruptcy is never an easy decision, and is often part of a scary and painful process. If you are considering bankruptcy, you need to be aware of the tax implications as well as whether bankruptcy would really be of help in your situation. In this article, we will talk about some of the limitations of bankrupting tax debt, and how taxes are assessed during bankruptcy.

The first thing you might wonder is if your tax debt can be discharged in a bankruptcy. The answer is that it depends on the type of bankruptcy you file (Chapter 7, 11, or 13) as well as some factors pertaining to the debt itself.

Before your tax debt can be discharged in any bankruptcy, it must meet all of certain criteria: The due date (plus any extensions that were filed) for your delinquent taxes must be at least three years ago. Any taxes that will be discharged must also have been filed on a return at least two years ago. There must also have been at least 240 days to pass since the IRS assessed the tax. Additionally, there must not be any fraud on your tax return or any sort of an attempt to evade taxes. Finally, no un-assessed or trust fund taxes can be discharged.

A Chapter 7 bankruptcy can provide for the liquidation of your tax debt, but you must pass a means test. Your income, for instance, must be below the state median. Remember, tax is not consumer debt, so some benefits may not apply. For Chapter 11 or Chapter 13 bankruptcy, there will be a payment plan established. The individual will serve as the trustee of the bankruptcy estate under a Chapter 11 bankruptcy, while another party serves as the trustee of a Chapter 13 bankruptcy.

Now let’s talk about paying taxes during your bankruptcy. Chapter 13 bankruptcy creates a bankruptcy estate that is not taxable, so you should continue to file the same kind of federal returns as before. For those who file Chapter 7 or 11, one of the first things you need to know is that the bankruptcy estate is now a separate entity, and is therefore taxable.

For individuals filing Chapter 7 bankruptcy, the newly-formed estate files taxes on gross income based on the portion of the individual’s gross income that which the estate can be entitled to, if any. The income also includes the proceeds from any sales of property of the estate after the bankruptcy process has started. Anything the individual has received prior to the start of the bankruptcy process cannot be counted as income of the estate, nor can any income earned by the individual after the bankruptcy petition date. In the case of a Chapter 11 bankruptcy, any wages earned by the individual through the performance of services should be included on the bankruptcy estate’s return.

In the case of a Chapter 7 bankruptcy, any taxes that weren’t discharged must be paid back after bankruptcy. If the IRS filed a tax lien notice before you petitioned to file bankruptcy, this tax may be now a “secured tax” that will remain attached to your assets. However, you might be able to pay some other non-tax “priority claims” in the disposition of your bankruptcy.

Taxes before, during, and just after bankruptcy are a complex matter. Whether taxes are part of your debt issue or not, you need the services of a tax resolution specialist to navigate these murky waters.

About the Author: Tommy Brown, Enrolled Agent, has successfully resolved tax issues for thousands of clients nationwide. If you owe past due taxes to the IRS and need to arrange a tax settlement or IRS debt relief, contact him at

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