When you’ve still got taxes after bankruptcy, things can get complicated.
That’s because some taxes got discharged in bankruptcy, while others may live on.
The taxes that live on get an extension on their life span.
And liens after Chapter 7 just keep on chugging.
So let’s make sense of taxes after bankruptcy.
Which taxes not discharged
Three kinds of taxes don’t get discharged in bankruptcy:
- recent income taxes;
- taxes for which no return was filed; and
- the trust fund portion of employment taxes if you have employees.
There are some others, but these are the common survivors.
How long do taxes live?
Tax liability isn’t forever. Federal law limits how long the IRS may collect past due taxes. The general rule allows collection for 10 years from assessment of the tax.
Usually assessment happens when the IRS logs in your tax return. Or it may happen following an audit. But assessment is the starting point.
Life of tax extended by bankruptcy
The collectability of a tax not discharged in bankruptcy is extended by the time the taxpayer’s bankruptcy case was open, plus six months. See IRC 6503
So, the collection clock stops ticking while you are in bankruptcy, and doesn’t resume ticking until six months after the case is closed.
Tax liens after discharge
The basic rule about tax liens is that, without a further order of the bankruptcy court, a tax lien remains enforceable after a bankruptcy discharge.
If the tax for the year associated with the lien is discharged, then the lien doesn’t attach to anything you acquire after bankruptcy. But it remains a charge on the assets you owned when you filed bankruptcy.
Conversely, if the tax was not discharged, the lien will continue to attach to newly acquired assets.
State taxes treated the same
State taxes are subject to discharge, just like federal taxes. However the collection statute for state taxes is a matter of state law.
For instance, the California tax collection statute gives the state 20 years to collect California taxes.
So the state’s general collection period may differ from the IRS and any additional period added to the collection statute by reason of bankruptcy.