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Federal and State Income Taxes - Dischargeability

Discharging Federal & State Income Taxes

Taxes and Bankruptcy

Hundreds of billions of dollars of income tax debt are owed by individual taxpayers/debtors to the Internal Revenue Service (IRS) state taxing authorities. Many people fall behind in their income tax obligations for various reasons; however, falling behind in your monthly income tax debt obligations to the IRS or state taxing authority often snowball the effect. When this happens many Americans find their past due income tax obligations to be too great, particularly when this burden falls on top of additional debts that are owed to other creditors. There are several ways to avoid or delay paying these debts legally.

It is far from unheard of for a debtor's primary unsecured creditor to be the IRS or the New Jersey Division of Taxation. There is nothing inherently inappropriate with having to file for bankruptcy relief primarily for the purpose of discharging excessive income tax debt. As a general rule, Federal or State income tax debts which became due three or more years prior to the filing of a bankruptcy petition are dischargeable at the successful conclusion of a debtor’s Chapter 7 or 13 case. However, there are several other conditions, mainly procedural, which must be met in order for income taxes to be dischargeable - these conditions are as follows:

  • The due date for filing the return must be at least three years before your bankruptcy filing date.

  • The return must have been filed at least two years before your bankruptcy filing date.

  • The tax must have been assessed at least 240 days before your bankruptcy filing date.

  • There must be no record of a willful attempt to evade paying the taxes, and no fraudulent returns.

  • After the IRS audit assessment, the amended return must be filed with the state. The three and two year conditions apply to the amended return's due date and filing date.

In accordance with the above conditions federal or state income tax debts that become due prior to 3 years before the petition is filed are considered "priority debts" and will not be dischargeable under the prospective discharge order to be received at the successful conclusion of a Chapter 7 and/or 13 case. Additionally, the amount of income tax owed by a debtor to the IRS or a state government cannot be in dispute. I.e., if a debtor is involved in an ongoing dispute with the IRS or state government taxing authority regarding the amount of income tax owed, once the dispute is resolved during or after the successful conclusion of the debtor's bankruptcy case the income tax would not be dischargeable.

If debtors have substantive federal and/or state income taxes that are not dischargeable, debtors would still have to deal with the taxing authority after being discharged/the successful conclusion of their Chapter 7 case. In a Chapter 13 case this non-dischargeable "priority" income tax debt would have a priority preference over a debtor's general unsecured creditors and this debt would have to be dealt with by the debtor after the conclusion of his/her Chapter 13 case, unless paid in full by the debtor within the his/her chapter 13 plan (see the article entitled “The Chapter 13 Process” in the bankruptcy specific section in our website’s homepage).

Most Other Personal Taxes Directly Owed by Debtors to The Taxing Authority Are Not Dischargeable in Bankruptcy

Many other tax obligations will not qualify to be discharged under Chapter 7 bankruptcy, including but not limited to trust fund taxes such as payroll taxes and several other types of taxes. However, the existing secured tax liens can often be removed during or after the filing of a Chapter 7 or Chapter 13 petition give their unsecured.) See other articles in this website entitled Chapter 13 Petition/Process in Chapter 7 Petition/Process).

If you are significantly behind on your monthly income tax payment obligations to the IRS, New Jersey or New York, it is best to communicate with an experienced Bergen County bankruptcy lawyer. The Bankruptcy Code's conditions and requirements are complex. With the IRS involved this is particularly true and can make your case/situation more difficult emotionally. Having credit card or mortgage debt is one thing, but being indebted to federal or state governments is a whole new form of fear for those struggling with debt. Tax debts cause a different and particular type of stress when they are overdue and there just isn't enough money to pay them.

At The Law Office of Marc G. Alster, you and your family will be consulting with an attorney with over 30 years of experience. Mr. Alster is a member or has been affiliated with significant legal associations, such as the National Association of Consumer Bankruptcy Attorneys for many years. Contact the firm today at or fill out the online form to schedule a free initial consultation and see how the firm can assist you. When you come into your consultation, be very sure to provide Mr. Alster with as much information as possible regarding each type of tax, including the interest and penalties associated with the underlying tax, and for which year(s) the tax is owed. As long as you come in to your consultation with this specific information needed, Mr. Alster will be able to accurately determine which underlying annual, income tax debt, interest and penalties will be dischargeable and which will not at the successful conclusion of your Chapter 7 or 13 proceeding.

From his office in Hackensack, New Jersey, Attorney Alster's services extend throughout the state of New Jersey, as well as New York. Some areas he serves in New Jersey are Passaic County, Bergen County, Hudson County, Essex County, and more; in New York, he serves Rockland County, Queens, and the Bronx.