Income Tax Debt and the IRS

Contrary to popular belief, the personal income tax debt can be effectively managed and discharged in bankruptcy. If your bank account has been frozen or your wages garnished, then I can have your bank account and wages released. In most cases, we can file for protection the same day you call us at either our Savannah or Hinesville office. We serve Savannah, Hinesville, Port Wentworth GA, and the surrounding areas.

It is illegal for the Internal Revenue Service to attempt tax levies, wage garnishment, bank account garnishment or any kind of seizure of your property after you file for chapter 13 or chapter 7 protection. The same protections hold true if you owe the Georgia Department of Revenue or other State Tax agencies, and if you owe County or City taxes as well.

The law on which tax debts are forgiven and which you will have to pay are complex and there are many exceptions to rules: but in general, if you got your returns filed at least two years ago and the years you owe are over three years in the past, then you won’t have to pay the tax debt, it can be discharged in bankruptcy. Interest and penalties stop when you file chapter 13 or chapter 7; and in many cases, penalties will be waived or reduced.

Should I File Personal Tax Returns Before Submitting Bankruptcy?

After the decision is reached to file a Georgia bankruptcy petition, the individual must provide copies of tax returns and personal tax records if required to file. Filing tax returns before submitting a bankruptcy petition is always advised for the following reasons:

  1. IRS may assess significant penalties and interest when tax returns are not filed. Penalties and interest resulting from failure to file might not be discharged in the bankruptcy case. Property is then at risk if the IRS files a tax lien.

  2. Personal tax owed does not go away after the individual files a bankruptcy petition. The tax bill continues to grow, even prior to the addition of penalties and interest. If the Georgia resident files a Chapter 7 case, taxes owed can affect decisions made by the court. If the individual files a Chapter 13 case with the court, taxes owed almost certainly affect the outcome. Taxes, considered priority debt, must be paid in a Chapter 13 plan.

  3. If the petitioner's disposable income is insufficient to pay taxes and priority debts, the claim is dismissed. The claimant's last tax return must be filed with the Trustee. In Chapter 13 plans, the Trustees often as for several prior years' tax returns. If the claimant does not have his or her complete tax returns, the court has grounds to request case dismissal.

  4. When the petitioner submits tax returns and is due to a tax refund, these monies may belong to the Chapter 7/Chapter 13 estates. The refund may be collected for creditors.

Although personal tax owed is generally considered "not dischargeable" in bankruptcy, in some cases tax debt from prior years may be discharged. In order for an unsecured income tax debt (including penalties and interest) to be discharged in bankruptcy, the claimant must meet requirements outlined in sections 523 (a,8) and 508 (a, 8) of the bankruptcy code.

Prior Tax Returns

According to bankruptcy law, taxes must have become due more than three years prior to the filing of a bankruptcy petition. For instance, if the individual owes income taxes for 2008, these would become payable to IRS on April 15, 2009, or more than six years ago. If filed on schedule, the requirement is met. In this example, the tax return for 2008 must have been filed with IRS at least two years prior to the filing of a bankruptcy petition. If the taxes were not filed until April 15, 2010, the taxes, in this case, could still be considered dischargeable. However, if the petitioner did not file the 2008 return until April 15, 2011, he or she would need to wait another two years (April 15, 2012) in order to file a bankruptcy petition.

The law states that tax returns must not be fraudulent, which is not the same as an inaccurate tax return. Human error or mistakes may prompt the individual to refile or amend a tax return.

Taxes must be assessed a minimum of two hundred forty days prior to the filing of the bankruptcy case. In most instances, taxes are assessed at the time the individual files the return. IRS evaluation, amendments, and corrections may create a later assessment of the tax return years after the taxpayer submits the return.


Bankruptcy code states that if the individual cannot afford to pay his or her taxes on time, it is important to file the return when it is due. The accuracy of the tax return is also essential. The taxpayer should never estimate tax return data. The discharge of significant taxes owed requires the assistance of a qualified bankruptcy attorney. When the individual files a bankruptcy petition may help him or her discharge large tax debt.


For these reasons, overdue tax returns, refunds, potential discharge of significant taxes, and tax issues not mentioned here are important items to discuss with a bankruptcy attorney before taking the next steps. During an initial consultation, a qualified bankruptcy attorney can assist the individual seeking to file a bankruptcy petition with proactive tax planning information.

Free Legal Advice in Savannah and Hinesville, GA

Contact us today to schedule a free lawyer consultation in Savannah or Hinesville, GA or just swing by one of our offices. John E. Pytte can offer you the legal advice you need for any personal tax issues. We serve Savannah, Hinesville, Port Wentworth GA, and the surrounding areas.