If Don is insolvent both before and after the discharge, the tax law provides that he will recognize no income. Net operating losses, can create tax refunds in the future, but also currently because they can be carried back to prior tax years by filing an amended tax return. Because of the availability of net operating losses, and the availability of possible refunds, tax planning becomes an essential element in any bankruptcy. Somewhat surprisingly, some taxes are dischargeable in bankruptcy. Trust fund taxes, like social security taxes and unemployment taxes withheld by employers, are non dischargeable.
Taxes secured by a valid tax lien are a priority claim and likely to be paid.
Taxes not secured by a tax lien are lower priority claims but still are entitled to priority over many other types of claims. Stale taxes, which are taxes older than three years, are not entitled to such priority and are likely not to be paid in bankruptcy, although they are not technically discharged by the bankruptcy. Filing for bankruptcy does not relieve a debtor of the responsibility of filing an income tax return. When taxes are not paid, tax authorities can impose a tax lien on property of the debtor. A tax lien is the right of a taxing authority to attach and levy against specific property.