Legal Question in Bankruptcy in Illinois
Internal Revenue Service
After a discharge of debts is granted, is there a federal (IRS) statute requiring us to pay income tax on those debts that were discharged?? In other words, is there a net income effect on the discharge that requires us to pay income tax?
2 Answers from Attorneys
Income Tax on Debts Discharged in Bankruptcy
Generally, there will be no income tax on debts discharged in any bankruptcy proceeding. However, if the income was taxable for some other reason, there will be taxes due. The specific statute if you have more questions is 26 USC 108.
Taxability of discharged debt
The scource of this question comes from the fact that forgiveness of a debt is taxable. On past occasions IRS has attempted to assess tax on discharged debt. The courts have found that a discharged debt is not a forgiven debt. The debt still exists; however it is not enforcible. Therefore a discharged debt is not taxable
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