Discharging Income Tax Debts: What is Not Dischargeable?

Some Income Tax Debts are Not Dischargeable in Bankruptcy. Getty Images

As we know, taxes are sometimes dischargeable and sometimes not. We know that dischargeability depends on a number of criteria. Most of those criteria are related to the time a return was filed or other event occurred in the life of a tax return or tax obligation. To learn more about those criteria, including the Three-Year Rule, the Two-Year Rule, and the 240-Day Rule, check out our article on Discharging Income Tax Debts: What is Dischargeble?

That leaves a lot of taxes that are, unfortunately, not dischargeable.  To learn more about how you can use bankruptcy cases to manage nondischargeable tax debts, see Using Bankruptcy to Manage Nondischargeable TaxesDebts.

Here is a rundown of those types of debts.

Any taxes that are not discharged: This sounds a little too obvious, but it is important to emphasize that income taxes may meet all the criteria for discharge but fail on just one requirement. When that happens, the tax becomes nondischargeable. This is one of the reasons it is vital to consult with an experienced consumer bankruptcy lawyer or a tax professional to determine the best timing for filing a bankruptcy case.

Tax Liens. Sometimes, the taxing authority places a lien on your property to secure the payment of the outstanding taxes. When the taxes are secured, there are really two things going on. First is your personal liability to pay the taxes.

Second is the extra step - the placing of the lien - that gives the taxing authority the right to your property if you fail to pay the tax. This is similar to what happens when you take out a car loan.

When the taxing authority places a lien, the lien will attach to your property and does not go away simply because the taxes were discharged in the bankruptcy.

The bankruptcy does not affect the lien. Therefore, when you come out of bankruptcy, you may have eliminated your personal liability, but the lien is still attached to your property. When you sell your property, especially your real estate, the lien will have to be satisfied from the sale proceeds.

Property Taxes:  If your property taxes were payable within one year of your bankruptcy filing, they are not dischargeable. If they are older than a year before your bankruptcy, you may be able to discharge the personal liability, but most property taxes carry a lien that secures their payment. So, you might be able to eliminate your personal liability, but the lien will remain and will be satisfied when you sell the property (unless the taxing authority decides to try to sell it before then.)

Trust Fund Taxes: These are taxes that your employer or another party is required to withhold from your pay, like income tax, Social Security and Medicare. It also includes sales taxes that a business collects on the sale of goods or services.

Certain Employment Taxes, Excise Taxes and Custom DutiesExcise taxes are taxes levied on certain types of goods. They are usually included in the sales price.

Some examples are gasoline, liquor and tobacco products. Custom duties are taxes charged on goods that are imported into the country.

Erroneous Tax Refunds or Credits Relating to Nondischargeable Taxes: These are amounts that are usually charged back against the taxpayer after the tax return is filed. They may include refunds that were issued by the taxing authority’s mistake, refunds issued due to error.

Tax Penalties: Tax penalties are designed to do one of two things. They either operate to reimburse the government for money lost, or they act as punishment for wrongdoing. Punitive tax penalties are nondischargeable if the tax is nondischargeable. Non-punitive tax penalties on nondischargeable taxes are themselves nondischargeable if the transaction or event that triggered the penalty occurred less than three years before the bankruptcy case was filed.