• You may be able to discharge tax penalties in bankruptcy. This determination depends on the type of tax debt the unsecured tax penalty is associated with and whether you file for Chapter 7 or Chapter 13 bankruptcy. If the tax penalty is associated with a tax debt secured by a lien on an asset, it may not be discharged.
  
  

Tax Penalties

• The IRS charges taxpayers a penalty for failing to file or pay taxes by the April 15 deadline. If a person fails to file by the deadline, but does not owe any taxes, the IRS will not assess a penalty. The three types of penalties include failure-to-file, failure-to-pay and interest. The IRS calculates the failure-to-file penalty based on when the tax return was due and when the taxpayer filed the return. The penalty is a 5 percent charge on the taxes owed for each month the tax return remains unfiled, but it cannot exceed 25 percent. If a person files on time but does not pay the taxes owed by the deadline, the IRS will assess a penalty of 0.5 percent for each month the taxes remains outstanding. The IRS also charges interest---about 4 percent per year---on outstanding taxes.
  
  

Chapter 7

• A Chapter 7 bankruptcy eliminates all debt eligible for discharge. Unsecured tax penalties, like other types of unsecured debt, may be eligible for discharge. In Chapter 7, if the tax penalty is from a priority tax debt, it is not eligible for discharge. Tax penalties may be discharged if the tax debt the penalty is associated with is eligible to be discharged or if the penalty is associated with a tax debt that arose more than three years before the bankruptcy filing; this applies even if the underlying tax debt may not be discharged.
  
  

Chapter 13

• A Chapter 13 bankruptcy allows the debtor to repay creditors over time. The bankruptcy court treats an unsecured tax penalty as it does any other unsecured debt. The debtor will repay the penalty over time in a three- or five-year repayment plan. Usually, a debtor only pays a portion of what they owe to unsecured creditors. In some cases, unsecured creditors receive nothing. Tax penalties can be discharged when the debtor completes the plan. A Chapter 13 bankruptcy also has the advantage of disallowing any new penalties from accruing on pre-petition taxes arising during the payment plan.