Certain income tax debts may be discharged in a Chapter 7 or a Chapter 13 bankruptcy. In a bankruptcy, you should always evaluate whether any of the income tax debt can be discharged. Many attorneys mistakenly assume that federal tax debt cannot be discharged. The rules for determining whether an income tax is dischargeable are very complex.1 The analysis should be done for each tax year.
If most of the client’s debt is federal tax, an Offer in Compromise may provide the client with better relief from his tax debt than a bankruptcy.2 In some cases (e.g., if the taxpayer filed the tax return after the IRS assessed the tax by a Substitute for Return), an Offer in Compromise may be the only option.
- 1See Nat’l Consumer L. Ctr., Consumer Bankruptcy Law and Practice § 15.4.3.1.1 (12th ed. 2019); Effectively Representing your Client Before the New IRS ch. 21 (ABA 8th ed. 2021); Morgan D. King, Discharging Taxes in Consumer Bankruptcy Cases (2012).
- 2For a complete discussion of Offers in Compromise, see Section 7.3.