It feels responsible. The IRS is threatening a levy, so you put the balance on a credit card, pull a cash advance, or take a personal loan and pay the tax in full. The IRS goes away. The card company does not.

A year later the card balance is crushing you and bankruptcy looks like the answer. Here is the problem: the Bankruptcy Code has a rule aimed squarely at this move.

What § 523(a)(14) says

Section 523(a)(14) excepts from discharge any debt "incurred to pay a tax to the United States that would be nondischargeable pursuant to paragraph (1)." Section 523(a)(14A) does the same for taxes paid to any other governmental unit, such as a state.

In plain English: the card debt takes on the character of the tax it paid. If the tax could not have been discharged, the debt you used to pay it cannot be discharged in a Chapter 7 either.

The flip side: old taxes

The key words are "would be nondischargeable." If the tax you paid would have been dischargeable, the exception does not apply, and the card debt is treated like ordinary unsecured debt.

So the question becomes: would the tax you paid have passed the timing rules and the other tests in § 523(a)(1)?

  • Return due more than three years before the petition (the 3-year rule)
  • Return filed more than two years before the petition (the 2-year rule)
  • Tax assessed more than 240 days before the petition (the 240-day rule)
  • No fraudulent return or willful evasion

Use the discharge calculator on the tax years you paid with the card. If those years would have qualified, the (a)(14) exception should not bite.

The irony is common: people use a card to pay a recent tax, the one that was never dischargeable, and turn a priority tax that a Chapter 13 plan would have paid over time, under court protection, into card debt that cannot be discharged in Chapter 7.

Chapter 13 is different

This is the part most people miss. The Chapter 13 discharge after you finish your plan, under § 1328(a), is broader than the Chapter 7 discharge. Section 1328(a)(2) lists the § 523(a) exceptions that survive a completed Chapter 13 plan: paragraphs (1)(B), (1)(C), (2), (3), (4), (5), (8) and (9). Paragraphs (14) and (14A) are not on that list.

That means debt incurred to pay a tax can be discharged at the end of a completed Chapter 13 plan, even if the underlying tax was recent. The card company is a general unsecured creditor in your plan and gets whatever unsecured creditors get.

Two caveats:

  • Hardship discharge. If you do not finish your plan and get a hardship discharge under § 1328(b), § 1328(c)(2) excepts every kind of debt in § 523(a), including (a)(14).
  • Fraud claims survive. Section 523(a)(2), debts obtained by false pretenses or actual fraud, is on the § 1328(a)(2) list. If a lender can show you borrowed with no intent to repay, that is a separate fight.

For more on choosing the chapter, see Chapter 7 vs Chapter 13 for tax debt.

Who has to prove it, and when

Section 523(c) only requires the creditor to file a lawsuit in the bankruptcy case for exceptions under paragraphs (2), (4) and (6). Paragraph (14) is not one of them. Under Bankruptcy Rule 4007(b), a dischargeability complaint on that kind of debt may be filed at any time. A card issuer can raise (a)(14) after the case, typically when it tries to collect.

In practice, the creditor has to tie the debt to the tax payment and show that the tax would have been nondischargeable. With a card that also carries purchases and other payments, how payments were applied and what portion of the remaining balance is the tax payment becomes a real question.

Other ways people borrow to pay taxes

  • Cash advances and personal loans. Same analysis. If the money went to a nondischargeable federal tax, (a)(14) applies in Chapter 7.
  • Home equity loans. These are secured by your house. Discharge only removes your personal liability; the lender's lien on the house generally stays.
  • 401(k) loans. A loan from a qualified retirement plan has its own exception under § 523(a)(18), whatever it was used for.
  • Loans from family. If the loan was used to pay a nondischargeable federal tax, the family member is in the same legal position as a bank under (a)(14). Separately, repaying relatives shortly before filing can create problems with the trustee.

Fees on top of the tax

Paying the IRS by card is not free. The IRS uses outside processors, and according to IRS.gov, the processors charge the fee and no part of it goes to the IRS. Then add the card's interest rate, which often runs well above the interest the IRS charges. You may be trading a manageable IRS balance for a bigger, more expensive one.

Warning: If you are considering bankruptcy, do not run a recent tax bill through a credit card first. In Chapter 7 you may end up owing the card company for a debt you cannot discharge, plus the fees and interest you added along the way.

What to gather

  1. Card and loan statements showing the date and amount of every payment to the IRS or a state
  2. IRS account transcripts for the years those payments were applied to
  3. Filing dates and assessment dates for those years
  4. Any later payments or balance transfers on the same card

That is enough to answer the first question, which is whether the tax you paid would have been dischargeable. For background on using bankruptcy against tax debt in general, see bankruptcy for tax problems.

If you paid the IRS with borrowed money and now need relief, call (813) 229-7100 and have Darrin T. Mish, a tax attorney, trace those payments back to the tax years before you choose a chapter. Every case turns on its own transcripts and dates; this page is general information, not legal advice for your situation. The card statement tells you what you owe. The tax transcript tells you whether you can get rid of it.