Discharging Income Taxes In Chapter 13 Bankruptcy

As a bankruptcy lawyer I frequently have to inform people filing Chapter 7 bankruptcy that their income tax debts will not be discharged. Income taxes will not be discharged, if less than three years has passed since the due date of the tax return, if less than two years has passed since the actual filing of the tax return, or if the taxpayer made a willful effort to evade or defeat taxes.

Since a chapter 13 bankruptcy  discharges many debts that are not discharged in a Chapter 7 the next question is will the income taxes be discharged in a chapter 13. The answer is yes "sort of."

While a chapter 13 will discharge income taxes one of the rules for a chapter 13 plan is that it will have to pay off 100% of priority debts through the plan. And to make it more complicated, some nondischargeable income taxes are priority debt and others are not.

If it less than three years since the due date of the tax return, the unpaid taxes are a priority debt, and the chapter 13 plan must pay them off in their entirety. However, if the three years has passed, and it is less than two years since the actual returns were filed, or if the taxpayer made a willful effort to evade or defeat taxes, the taxes become general unsecured debts, and the plan merely has to pay the IRS the same percentage that unsecured creditors receive.