Tax Penalties in BankruptcyIf there is one debt you do not want, it is tax debt.  The government can be one of the most ruthless collectors. The IRS puts other creditors to shame with the power it wields in its ability to make your life miserable, and tax penalties that accrue on back taxes can make an already out of hand tax bill insurmountable. Fortunately, tax penalties can be discharged in bankruptcy, but they are tied to the dischargeability of the underlying tax debt.

Chapter 7

  • Tax penalties stemming from priority (nondischargeable) taxes are not dischargeable. This includes trust tax penalties.
  • Tax penalties stemming dischargeable taxes are dischargeable. Click here to see if your taxes are dischargeable.
  • Tax penalties associated with taxes arising more than three years before the bankruptcy are dischargeable, even if the tax to which it is linked isn’t dischargeable.

Chapter 13

  • All unsecured penalties are dischargeable.  Penalties can be paid at the same rate as non tax claims, usually a fraction on the dollar.
  • Fortunately, no new tax penalties will accrue curing the Chapter 13 plan period (a 3-5 year period).