Can bankruptcy discharge back taxes, such as personal income taxes?

Yes, sometimes.

Normally, your chapter 7 case doesn’t affect priority debts (“government type” debts, like taxes, child support/alimony, student loans, and criminal restitution).  However, some taxes can be discharged by bankruptcy.

To discharge taxes in a chapter 7 bankruptcy, your back taxes must follow these five rules:

1.  they are income taxes (not business taxes, unemployment taxes, etc.),

2.  the taxes are at least 3 years old,

3.  you filed the returns more than 2 years ago,

4.  the taxes were assessed more than 240 days ago,

5.  there was no willful fraud or evasion.

You can file a chapter 7 bankruptcy and then file a separate adversary proceeding to determine if they are discharged, but most people simply file the chapter 7 and list the taxes in their bankruptcy.  If the personal income taxes meet those five rules, they are discharged.

The most frustrating thing is that you won’t get a written letter from the IRS or State Tax Commission saying, “Your taxes are now discharged.  Have a great day!”  Instead, you will simply have to watch for your next collection notice from them to see how much of your penalties and interest survived the bankruptcy because they were assessed during that 240 day window before you bk was filed.

And please remember that the bankruptcy does not discharge any tax liens filed against your property.  Those liens are still valid.

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