A debtor's ability to discharge any tax debt in bankruptcy is based on the classification of the debt. The types of tax claims are:
- Trust Fund Taxes - taxes collected by third parties such as sales taxes and income tax withholdings
- Secured Claims - claims secured by a lien on property
- Administrative Tax Claims - taxes accrued during bankruptcy filing
- Priority Tax Claims - claims from certain governmental units
- General Unsecured Claims - old claims not under any other category
- Penalty Claims - penalties charged for old claims
How Are the Tax Debts Discharged?
In a liquidation or Chapter 7 proceeding, the tax debts are discharged by the court along with all other debts.
In a reorganization of debts or Chapter 13 proceeding, only certain tax debts may be discharged but other advantages exist. A debtor may receive a discharge for tax liabilities related to unpaid debts even if the taxes have not been paid. Furthermore, under Chapter 13 reorganization, creditors holding priority tax claims must file and prove that their claims are valid and unpaid. If a filing or proof is not made, then the debtor will be discharged of those debts.
Not all tax debts can be discharged. Specifically, secured claims and trust fund taxes cannot be discharged.
Is There Any Way Tax Debts Cannot Be Discharged?
Yes, three circumstances exist where claims will be considered nondischargeable. They are:
- the priority tax claim is filed in court before bankruptcy is declared
- the debtor did not file a tax return
- the debtor filed a fraudulent tax return or otherwise attempted to evade tax debts