Taxes Discharged in Bankruptcy
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Taxes Discharged in Bankruptcy











Extracted from Publication 802 Bankruptcy Tax Guide, IRS Website  irs.gov


Discharge of Unpaid Tax

The bankruptcy court may enter an order dis-charging the debtor from personal liability for certain debts, including taxes. The order for dis-charge is a permanent order of the court prohib-iting the creditors from taking action against the debtor personally to collect the debt. However, secured creditors with valid pre-bankruptcy liens may enforce them to recover property se-cured by the lien. Not all debts are dischargeable. Many tax debts are excepted from the bankruptcy dis-charge. The scope of the bankruptcy discharge depends on the chapter under which the case was filed and the nature of the debt. Chapter 7 debtors do not have an absolute right to a dis-charge; objections may be filed by creditors. Chapters 12 and 13 debtors are generally enti-tled to discharge upon completion of all pay-ments under the bankruptcy plan.

Chapter 7 cases. For individuals in chapter 7 cases, the following tax debts (including inter-est) are not subject to discharge: taxes entitled to eighth priority, taxes for which no return was filed, taxes for which a return was filed late after 2 years before the bankruptcy petition was filed, taxes for which a fraudulent return was filed, and taxes that the debtor willfully attempted to evade or defeat. Penalties in a chapter 7 case are dischargeable unless the event that gave rise to the penalty occurred within 3 years of the bankruptcy and the penalty relates to a tax that is not discharged. Only individuals may receive a discharge in chapter 7 cases; corporations and other entities do not.

Chapter 11 cases. The same exceptions to discharge that apply to individuals in chapter 7 cases also apply to individuals in chapter 11 ca-ses. However, different rules apply to corpora-tions. A corporation in a chapter 11 case may receive a broad discharge when the reorganiza-tion plan is confirmed; however, secured and priority claims must be satisfied under the plan. There is an exception to discharge for taxes for which the debtor filed a fraudulent return or will-fully attempted to evade or defeat.

Chapter 13 cases. A debtor who completes all payments under the chapter 13 plan shall re-ceive a broad discharge of all debts provided for by the plan. However, priority tax claims must be paid in full under the chapter 13 plan. The following taxes are excepted from the broad chapter 13 discharge: withholding taxes for which the debtor is liable in any capacity, taxes for which no return was filed, taxes for which a return was filed late after 2 years before the bankruptcy petition was filed, taxes for which a fraudulent return was filed, and taxes that the debtor willfully attempted to evade or defeat. Also, there is an exception from dis-charge for debts where the creditor, including the IRS, did not receive notice of the chapter 13 bankruptcy case in time to file a claim.

Chapter 13 "Hardship Discharge". In ca-ses where the failure to complete all payments under the chapter 13 plan was due to circum-stances for which the debtor should not be held accountable, the bankruptcy court may grant a "hardship discharge". However, all unsecured claims must be paid an amount not less than they would have received in a chapter 7 liquida-tion.

Note. Debts that would be excepted under an individual chapter 7 discharge are also ex-cepted from the chapter 13 hardship discharge.

Chapter 12 cases. The same tax debts that are excepted from discharge in chapter 7 cases of individuals are excepted from discharge in chapter 12 cases of individuals. The exceptions do not apply to chapter 12 cases of non-individ-uals. As in chapter 13 cases, the debtor may be granted a hardship discharge if appropriate.

Federal Tax Liens. If a tax is discharged, the discharged tax may still be collectable from the debtor's pre-bankruptcy property if the IRS filed a Notice of Federal Tax Lien (NFTL) before the bankruptcy petition was filed. Perfected liens generally pass through bankruptcy proceedings unaffected, even if the debtor's personal liability for the debt is discharged. If the IRS did not file a Notice of Federal Tax Lien before the bank-ruptcy petition was filed, the tax lien will gener-ally be removed from the debtor's pre-bank-ruptcy property as a result of the bankruptcy, even if the debtor exempted the property out of the bankruptcy estate. However, a tax lien that arises when a tax is assessed may not be re-moved from the property upon discharge if the property was excluded from the bankruptcy es-tate, even if a Notice of Federal Tax Lien was not filed.


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