FAQ – Bankruptcy Discharge

Does filing bankruptcy halt IRS collections?

Yes, the filing of a bankruptcy petition triggers the “automatic stay.” The automatic stay bars IRS collections actions. It does not bar criminal proceedings or IRS audits, appeals, or civil tax litigation.

Can the bankruptcy court redetermine my tax liability?

Yes, the bankruptcy courts are authorized to hear challenges to tax liabilities. They can do this in addition to deciding whether the tax debt can be discharged.

Are corporate and business taxes eligible for discharge in bankruptcy?

Generally, no. Only individual taxes are eligible for discharge in bankruptcy.

What are the requirements to discharge taxes in bankruptcy?

To be discharged in bankruptcy, generally, the tax has to be (1) for a tax where the tax return was already filed and on file with the IRS for at least two years and (2) for a tax with the due date for the return is greater than 3 years of the date the bankruptcy petition is filed. The tax cannot be attributable to a fraudulent return.

Are trust fund recovery penalties dischargeable?

No, trust fund penalties are not dischargeable in bankruptcy.

How do I know if my tax debt was actually discharged in bankruptcy?

The bankruptcy court has to specifically determine that the tax debt was discharged. Absent this determination, the IRS may argue that the bankruptcy court did not actually discharge the tax debt.

What happens to the IRS lien after a bankruptcy?

The bankruptcy discharge relieves you of liability for the discharged taxes. The IRS lien survives the bankruptcy. If you keep your exempt property after bankruptcy, the IRS lien will still attach to it. The idea is that your exempt property is not part of the bankruptcy estate and, therefore, any change caused by the bankruptcy laws does not apply to that property.