Bankruptcy may discharge some of your debts, but taxes assessed after you file the bankruptcy petition remain due. Back taxes may be discharged under certain conditions, none of which will work for taxes assessed after you file the bankruptcy petition. For the most part, the law requires you to file income tax returns and either have tax withheld or make estimated payments if you're self-employed.
Automatic Stays and Discharge
When you file a petition for bankruptcy, you request a federal court to shield you from creditors and collections. The bankruptcy court places an automatic stay on all collection activity and lawsuits from your creditors, including the IRS and state and local tax authorities. Once the petition is filed, you're in the post-petition period which brings a change in how you can handle new income, debts and taxes. Your bankruptcy case ends with a discharge of all debts that can legally be discharged, either through a Chapter 7 liquidation proceeding or after a Chapter 13 repayment plan.
Discharge of Overdue Taxes
The IRS will allow the discharge of some pre-petition taxes. There are several conditions: the tax return which generated the tax liability must have been due at least three years prior to the filing of the bankruptcy petition for the IRS to waive overdue taxes. In addition, you must have actually filed the return that generated the tax liability at least two years prior and the IRS must have assessed the tax at least 240 days prior. The IRS will not cancel or allow the discharge of any taxes if you're convicted of tax evasion or the agency alleges a fraudulent return. None of these conditions apply for taxes that are assessed after you file a petition for bankruptcy.
If you earn income while under bankruptcy protection, you are liable for income and withholding taxes under the same rules as everybody else. You must file returns and have your employer withhold taxes from your wages. With a revised W-4, however, you can request an exemption from withholding if you expect your tax liability to be zero for the current year. The taxes that you pay to the Social Security and Medicaid trust funds are non-negotiable in bankruptcy or out of it; you pay the same rate either way, and your employer is required to contribute its share. If you are self-employed, you must pay the total self-employment tax rate of 15.3 percent, as of 2013.
The Everlasting Tax Lien
The bankruptcy petition suspends collection efforts by the IRS, including garnishment of your wages and levies on your bank accounts. If you've filed for Chapter 13, the trustee will draw up a repayment plan that will include any back taxes you owed at filing. With a Chapter 7 case, your non-dischargeable tax debt survives, and the collections will resume after liquidation and discharge of your remaining debts. Even if the bankruptcy does succeed in discharging an old tax debt, any tax liens placed on your property by the IRS will still be there when you emerge from the process.