Individuals who are overwhelmed by financial obligations may be able to obtain a measure of relief by filing for Chapter 7 bankruptcy and getting some of their debts discharged. In some cases, past due income tax obligations may be discharged through bankruptcy as well. However, there are certain qualifications that they need to meet before this can occur.
The debtor must have filed proper tax returns for the previous two years prior to the Chapter 7 filing and cannot have committed tax fraud or evasion. Possible actions that are considered tax evasion are repeatedly not paying taxes or failing to report income. The tax debt must be from a return filed a minimum of three years prior to the bankruptcy filing, and the IRS has to have assessed it a minimum of 240 days before the filing date.
Only some tax indebtedness is dischargeable. Penalties for fraud are not subject to discharge, nor are payroll taxes. However, penalties that are related to the discharged tax debt can be discharged as well. If the IRS had previously puts a tax lien on any property, it will remain even after the discharge, however, and thus it will have to be removed before the property can be sold.
Individuals who believe that the only way out of their troubled financial circumstances is to seek relief through Chapter 7 bankruptcy, may wish to speak with an attorney about whether they qualify to have their tax and other personal debt discharged. In some cases, other forms of debt relief may be available, including in the case of income tax indebtedness attempting to negotiate a settlement with the IRS.
Source: FindLaw, "Bankruptcy and Taxes: Eliminating Tax Debts in Bankruptcy", accessed on Feb. 28, 2015