Filing bankruptcy triggers an automatic stay that temporarily stops IRS levies and collection efforts until other debts are discharged and the bankruptcy is finalized. Then any portion of the federal income taxes that have not been discharged in the bankruptcy become due and owing again, and the IRS may resume its collection activities. The temporary reprieve from IRS collection efforts can be valuable to the debtor, however. The relief from IRS wage garnishments, opportunity to get released from other debts, analyze whether some tax debts may be discharged, and re-organize payments to all creditors including tax agencies, can make repayment of any past-due taxes more manageable.
Some income taxes may be dischargeable in bankruptcy if they meet a number of requirements. Most other taxes, such as payroll and sales taxes, are not dischargeable. Federal and state income taxes are dischargeable if five conditions are met: the due date of the taxes must have been more than three years prior to filing bankruptcy; tax agency must have received your return more than two years prior to filing bankruptcy; taxes must have been assessed at least 240 days prior to the bankruptcy filing date; you must not have engaged in fraud or illegal tax evasion; and there must not be a tax lien in effect.
Whether past-due property taxes are dischargeable in bankruptcy depends on state law. If state law declares that property taxes constitute a lien on property--as is the law in most states--the past-due property taxes are not dischargeable in bankruptcy. In most cases, property taxes due on personal real estate will be resolved when the real estate title is transferred, so they do not usually become a difficult issue in bankruptcy. Most business personal property taxes are not dischargeable, however, and may be the subject of continued collection actions once the stay period relative to the bankruptcy has ended.
Discharges in Chapters 7 and 13
Owing taxes that cannot be discharged in bankruptcy will not preclude the bankruptcy court from issuing a discharge that releases you from your other debts. After a debtor receives his Chapter 7 discharge of other debts, any undischarged taxes are still owed and must be paid. In a Chapter 13 bankruptcy, past-due taxes are usually paid as part of the three- to five-year Chapter 13 repayment plan. A Chapter 13 discharge is usually not issued until after all payments under the repayment plan have been made, so in most cases, the back taxes will have been cleared before the Chapter 13 discharge is made.