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You CAN get rid of past due income taxes in a bankruptcy!
It is not true that bankruptcy cannot eliminate any tax liability. Treatment of tax liability is a complicated aspect of consumer bankruptcy law, but the Bankruptcy Code does offer many debtors substantial income tax relief. Whether or not your bankruptcy filing gets rid of your tax debt depends on the nature and the status of tax liability and the type of bankruptcy case you file.
Only individuals, not businesses, can discharge (get rid of) certain taxes through bankruptcy. The only tax eligible for discharge is federal income tax. Bankruptcy offers no relief from taxes for which the debtor/taxpayer was responsible for collecting from others such as FICA withheld from employees. Bankruptcy also will not relieve liability for excise taxes such as estate and gift tax, sales tax, or fuel taxes.
If the IRS has filed a tax lien, your income tax liability becomes a secured lien on all of your property. If a tax lien is in place prior to your filing bankruptcy, the IRS’s secured tax lien has priority over the bankruptcy filing, and bankruptcy cannot dislodge the lien from your property. Even property which would otherwise be exempt in a bankruptcy, such as homestead, cannot be sold or transferred without payment of the IRS tax lien. In this case, bankruptcy provides no tax relief.
Chapter 7 Bankruptcy will discharge all income tax liability except the following:
Taxes for which a tax return was due to be filed within three years (plus extensions) prior to the date of filing bankruptcy. For example, the tax return for 2003 income taxes was due to be filed on April 15, 2004 (plus any extensions), and therefore, these income taxes cannot be discharged by filing bankruptcy on or before April 15, 2007 (plus the time of extensions); OR
Taxes assessed by the IRS within 240 days before the filing of bankruptcy. Assessment date is the date that tax liability is entered on IRS records; OR
Taxes not yet assessed but still assessable; OR
Taxes for which a tax return was filed late and filed within two years prior to filing bankruptcy; OR
Taxes of a debtor who committed fraud related to a tax return or willfully attempted to evade or defeat taxes sought to be discharged.
Income taxes that do not fall into any of those categories five tests may be discharged in a Chapter 7 Bankruptcy.