Lawyer Monthly - August 2024

rules, the tax debt is a Priority debt and the taxes cannot be discharged, except by payment. For example, the tax might be over 3 years old, but if the taxpayer did not file a return for that tax year at least 2 years prior to the bankruptcy filing, then The Two Year Rule is not met and the tax debt is considered a Priority debt that must be paid in full. You can think of Priority taxes as embryonic Unsecured taxes. A Priority tax debt can be paid over 3 to 5 years in a Chapter 13 repayment plan. And a fringe benefit of including Priority taxes in a Chapter 13 is that the monthly interest charged by the IRS stops accruing the moment the Chapter 13 is filed.

least more than 240 days preceding the filing date of the bankruptcy (plus any period of over-lapping time during which an offer in compromise was pending, plus 30 days). 4. NON-FRAUDULENT RETURN RULE. 11 U.S.C. § 523(a)(1)(C). 11 U.S.C. §1328(a) (2). The tax return in question was nonfraudulent. 5. NO WILLFUL TAX EVASION RULE. 11 U.S.C. §523(a)(1)(C); 11 U.S.C. §1328(a)(2). The taxpayer has not engaged in activity deemed a willful attempt to defeat or evade the tax. So, if a tax debt satisfies each of the above rules, it is Unsecured and is fully dischargeable, without any payment, in a Chapter 7.

A common misconception about federal and state personal income taxes is that they cannot be discharged in a Chapter 7 or

a Chapter 13 bankruptcy.

Secured Taxes: If a tax lien has been filed, either

judicially or through recordation, against a taxpayer’s real or personal property

Priority Taxes: If the tax debt fails any one of the above

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