Chapter 13 Laws Regarding Income Taxes

By David Carnes

Bankruptcy rules concerning the discharge of federal income tax debt are different depending on whether you file under Chapter 7 or Chapter 13. Because Chapter 13 is designed for debtors who have the ability to repay their debts over time, your will probably have to pay at least some of your outstanding tax debt.

Dischargeable Tax Debts

Although some tax debts are eligible for discharge under Chapter 13, you must pay at least part of even your dischargeable tax debts during your three-to-five year debt repayment period. You can discharge tax debts more than three years old, as long as you filed a timely tax return the year before your Chapter 13 filing date. You can also discharge tax debts for which you filed a late return, as long as the return was filed at least two years before bankruptcy, and as long as any IRS tax assessment was made more than 240 days before your filing date.

Interest and Penalties

You can discharge the interest that accrued on any tax debt that is discharged. You can also discharge part or all of any penalties that were assessed more than three years before your Chapter 13 filing date. IRS interest and penalties stop accumulating on the date you file for bankruptcy.

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Taxes That Cannot Be Discharged

Some tax debts cannot be discharged -- taxes assessed within 240 days before your filing date, tax debts less than three years old, and tax debts for which the IRS filed a tax return on your behalf. These are considered "priority debts." Priority debts must be repaid in full under the Chapter 13 debt repayment plan. The amount due includes any interest and penalties that cannot be discharged. Even tax debts that cannot be discharged, however, do not continue to accumulate interest and penalties after you file under Chapter 13. You cannot discharge an IRS tax lien or the tax debt that the lien secures.

Tax Returns

You must provide the bankruptcy trustee with a tax return for the most recent tax year soon after filing under Chapter 13. In addition, you must file tax returns that come due during the bankruptcy proceedings and the repayment period, and you must provide the bankruptcy trustee with a copy of these returns within 10 days after filing them.

Tax Refunds

Whether or not you receive a tax refund depends on whether or not you pay 100 percent of your debts to all your creditors under your repayment plan. If you repay your creditors in full, you are entitled to your refund. If your repayment plan is a "base plan" -- meaning that you pay less than 100 percent of the amount owed -- your tax refund will be reduced by the amount necessary to satisfy your creditors. If your unpaid debt is more than the amount of your refund, you will lose all of it. It is your responsibility to turn over your tax refund to your bankruptcy trustee.

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