There is a common misconception that income tax debt can’t be discharged in bankruptcy.  Most people I meet assume that tax debt can never go away, no matter what. Fortunately, that is not true. Under certain situations bankruptcy can help eliminate or reduce tax debts.

Generally speaking the older the tax debt is, the easier it will be to discharge in a chapter 7 or chapter 13 bankruptcy. For income taxes to be completely dischargeable in a bankruptcy, the following must apply:

  1. The taxes must be due more than 3 years ago, including extensions;
  2. The tax returns must have been filed more than 2 years before the bankruptcy is filed;
  3. The taxes were assessed by the IRS (or, State taxing authority) more than 240 days before the bankruptcy is filed;
  4. There was no fraud or willful evasion.

As an example we’ll take a person who owes income taxes from tax year 2010. We’ll assume there is no fraud issues and the person didn’t file an extension. We will also assume the debtor didn’t file the returns by the due date, but got around to filing the returns in December of 2011.  In this example, the 2010 returns would normally be due April 15, 2011. However, due to a federal holiday 2010 returns were due on April 15, 2011.  Let’s assume the IRS assessed the returns soon after they were filed in December of 2011.

So, in this case, the debtor has satisfied all requirements to discharge the tax debt in bankruptcy as long as they don’t file the bankruptcy until April 19, 2014 (3 years after the returns were due).

This is a simple example, and there can be several factors that will play a part on whether a person can discharge taxes in bankruptcy.  If you owe tax debt it is imperative that you seek a qualified tax and/or bankruptcy attorney to learn your options.  If you think you may qualify for a bankruptcy discharge on the taxes, you should seek a consultation with a bankruptcy attorney immediately. If you are able to provide tax account transcripts for the tax years you owe that will also help the attorney determine whether the taxes can be wiped away with a bankruptcy. You can obtain transcripts from the IRS here.

 

 

 

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