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5. Penalties & Interest


5.1. Interest. For federal tax debts, the interest follows the tax. If the tax is dischargeable in bankruptcy, the interest is dischargeable. If the tax is not dischargeable, the interest is likewise not dischargeable.        Index

5.2. Penalties.        Index

5.2.1. Tax Dischargeable – Penalty Dischargeable. If a federal tax is dischargeable in bankruptcy, the penalty is also dischargeable.       Index

5.2.2. Non-Dischargeable Taxes. The reverse of the previous rule is not necessarily true. In some cases, the penalties related to non-dischargeable taxes are likewise not dischargeable. However, in other cases, the penalty is dischargeable even if the underlying tax is not dischargeable.        Index

(a) Non-Dischargeable Taxes Less than 3 Years Old. In a Chapter 7 case, if the tax is not dischargeable because it relates to a tax year less than 3 years old, any penalty relating to the unpaid tax will also be non-dischargeable.       Index

Example #5.1.  Taxpayer files his federal income tax returns for the 2011, 2012, 2013 and 2014 tax years on or before the due date for each return. Taxpayer owes tax for each year (the amount is irrelevant), but fails to pay any of the tax. Taxpayer files for Chapter 7 bankruptcy on April 16, 2015. The bankruptcy will discharge the 2011 tax and any related penalty, but will not discharge the 2012, 2013 or 2014 taxes nor any related penalties.

(b) Non-Dischargeable Taxes More than 3 Years Old. Tax penalties are dischargeable in a Chapter 7 bankruptcy case if the events giving rise to the penalty occurred more than 3 years before the taxpayer files for bankruptcy, even if the related tax is not dischargeable. Recall that there are at least three types of tax claims that are not dischargeable in bankruptcy even if they are more than 3 years old:        Index

► trust fund taxes;

► taxes assessed within 6 years after a tax return is filed because income was under reported by more than 25 percent; and

► taxes owed because the taxpayer is guilty of tax evasion or the filing of a fraudulent return.

All penalties relating to these types of taxes can be discharged in a Chapter 7 case, although the underlying tax is not dischargeable, if the events giving rise to the penalty occur more than 3 years before the taxpayer files for bankruptcy.        Index

Example #5.2. Assume the same facts as Example #1.10. The additional $9,000 tax assessed by IRS on April 14, 2008 (5 years, 11 months and 30 days after the tax return was filed) is not dis­chargeable in bankruptcy. However, any penalty relating to the additional $9,000 tax will be discharged in bankruptcy because the events leading to the penalty (the under reported income on the 2000 return) occurred more than three years before the bankruptcy case was filed.