The bankruptcy court has equitable powers which allow it to resolve tax disputes with state and federal taxing authorities based on principles of equity and fairness.
The filing of a bankruptcy proceeding immediately stops the accrual of tax penalties and also stops most collection activity, such as wage and bank levies.
State or federal income taxes can be completely discharged (forgiven) in a bankruptcy proceeding if:
1) the taxes for such tax year are at least 3 years old;
2) a tax return was filed for such tax year at least 2 years prior to the bankruptcy filing date;
3) the tax return was not intentionally false or fraudulent; and
4) the tax was not assessed (determined or billed) by the taxing authority within the past 240 days.
Business owners and other individuals who taxing authorities consider to be “responsible persons” may be held personally liable for payroll taxes that were withheld from an employee’s wages but were not paid to the appropriate taxing authority. These taxes, also known as “trust fund” taxes, cannot be discharged in a bankruptcy proceeding.
The employer’s portion of employment taxes that were not withheld from an employee’s wages can be discharged in a bankruptcy proceeding under the same conditions specified above for state and federal income taxes.