Can Bankruptcy Wipe Out Income Tax Debt?


If I owe income taxes to the IRS or the Indiana Department of Revenue, can I discharge them by filing for bankruptcy?

Benjamin Franklin once wrote that “in this world nothing can be said to be certain, except death and taxes.” So it’s not surprising that many people believe it’s impossible to erase income taxes in bankruptcy.

But in some situations, a bankruptcy filing will wipe out at least some of your tax debt. And even if the taxes can’t be discharged, bankruptcy might still help you resolve your tax problems.

It’s Complicated

To determine whether your income tax debt can be discharged, your bankruptcy attorney will do a complex analysis. At a minimum, three questions must be asked for each tax year in question:

  • When was the tax payment due?
  • When did you file the tax return?
  • When did the IRS or the Indiana Department of Revenue assess the taxes?

Those are just the basics, and there may be other things that will affect the ability to discharge your taxes. For example, what if you didn’t file your tax return on time, and the IRS filed a “substitute for return” (or “SFR”) on your behalf? Sometimes — but not always — an SFR will prevent you from erasing those taxes in bankruptcy.

To put it simply, discharging taxes is complicated.¬†Whenever a client has income tax debt that might be dischargeable, I’ll order tax account transcripts so I can assess the situation carefully and provide accurate legal advice.

Other Ways Bankruptcy Can Help with Taxes

What if your tax debt can’t be discharged? You still have options. For example, discharging other debts in a Chapter 7 bankruptcy might free up enough cash flow to fund a post-bankruptcy installment agreement.¬†Or you might choose a Chapter 13 bankruptcy to force a payment plan on the IRS.

If you’re considering bankruptcy as a way to tackle taxes, it’s crucial to have professional guidance. If you’d like to schedule a free, no-obligation consultation on solving your tax and other debt problems, just give me a call at 317.454.8188.

Matt Conrad is an Indianapolis bankruptcy attorney and the founder of Conrad Legal LLC, which helps people in Central Indiana get out of debt with Chapter 7 and Chapter 13.

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