1. Dischargeable taxes are eliminated in Chapter 7 and are treated as general, unsecured creditors in Chapter 13. The above criteria is used for Chapter 7 tax discharge eligibility and if all the criteria is met, you can eliminate your tax liability.
Taxes which are non-dischargeable in Chapter 13 are considered priority debts and must be paid in full during the Chapter 13 plan without interest.
Secured tax liens cannot be discharged in Chapter 7. The secured portion of tax liability must be paid during a Chapter 13, in full and with interest, but without further penalty.
The Bankruptcy Code does not specify taxes that are dischargeable. It specifies taxes that are excepted from discharge. Income taxes excepted from discharge are primarily addressed in Bankruptcy Code sections 507(a)(7)(A), 523(a)(1)(B) and 523 (a)(1)(C). In simple language, unless secured, income taxes are not excepted from discharge, and consequently are dischargeable if aain, they meet the five points listed previously.
This applies to Federal Income tax. There is nothing in Arizona law that supersedes this criteria as it pertains to Federal Income Tax, and it is a Federal bankruptcy code.
2. Generally, the rules are the same for state income taxes as they are for federal ones. The bankruptcy code only talks about "taxes" meeting the 3-year rule, 2-year rule, etc.
However, there are some differences:
a. Some states send out preliminary notices of state tax deficiencies. In California, for example, the final date of assessment is 60 days or more after the proposed additional assessment. This extends the waiting time to discharge California state income taxes to 300 days So, 60 days are added to the 240 day federal rule for qualifying state taxes for bankruptcy.
b. Some states require filing an Amended Return after an IRS audit assessment. The 3-Year Rule qualification for bankruptcy is measured from when this Amended Return was due, and the 2-Year Rule from when it was filed.
c. Most state sales taxes are not dischargeable in Chapter 7. In Chapter 13, they are treated as priority taxes to be paid in full.
I could not find any information in any of the Arizona statutes that make any changes to the bankruptcy provisions, and the bankruptcy federal code is followed. If your attorney that is telling you Chapter 7 will not eliminate tax liabilities no matter what (completely wrong by the way) then ask him to provide some statutory authority to back it up.
Further information you might find helpful:
Arizona Revised Statutes, Sec. 42-2066. Statute of limitations on tax debts
A. A taxpayer's obligations for any tax, interest or penalty required to be collected by the department for any tax period are extinguished, if not previously satisfied, six years after the amount of tax determined to be due becomes final unless one of the following circumstances applies:
1. The department has commenced a suit to collect the debt pursuant to section 42-1114.
2. The taxpayer has agreed in writing to extend this time period before the time period expires.
3. Enforced collection has been stayed by the operation of federal or state law during the period. The period of limitations prescribed by this section is extended by the period of time that the department was stayed from engaging in enforced collections.
B. If a tax obligation is extinguished pursuant to this section, any related liens for those obligations are also extinguished.