Taxpayers who have outstanding federal tax liabilities often have other significant debts. By filing a petition in bankruptcy, taxpayers may be able to eliminate or reduce the amount of their debts. Bankruptcy is intended to allow a fresh start. In exchange for this fresh start, taxpayers turn over their assets for payment of their pre-bankruptcy debts – including tax liabilities – that meet certain requirements. After bankruptcy, debts that are not fully paid are discharged, provided they are unsecured or too old to be paid.
Significantly, not all tax liabilities are discharged in bankruptcy. The general rule is that taxes incurred within three years of the bankruptcy petition’s filing date or that are assessable within 240 days of the filing date, are not discharged in the bankruptcy proceedings. Also, federal tax liens encumbering the taxpayer’s property are not voided by the filing of a bankruptcy petition. The IRS ultimately may collect these taxes from the taxpayer. Still, bankruptcy can delay payment of taxes and may provide taxpayers with some opportunities to defend against the IRS’s collection efforts.