Some income taxes can be discharged in bankruptcy. Some can’t. It depends mostly, but not completely, on the how old the tax is.
To discharge an income tax debt, that particular tax must meet all of four main conditions. So to some extent it’s easy—you’re just checking off these conditions to see that they are all met.
But on another level, it’s not at all easy. There is a good reason why people have lots of misconceptions about this area—the intersection of the tax law and bankruptcy law can be very complex and confusing.
So here are the four conditions, but be sure to talk to a highly experienced bankruptcy attorney before acting on anything presented here.
1. Have three years passed since the tax return was due?
Every income tax obligation has a fixed date for which its tax return must be filed. Usually of course that’s April 15 of the following year. Three years must have passed since that due date to meet the first condition.
However, if you asked for an extension of time to file the return for that year—usually extending the due date from April 15 to October 15—the three-year period begins only at that extended due date. So, for example, the tax return for the 2009 tax year was due on April 15, 2010, but on October 15, 2010, if you got an extension. The 3-year condition will be met by filing bankruptcy after April 15, 2013 if there was no extension, or after October 15, 2013 with an extension.
2. Have two years passed since the tax return was in fact filed?
At least two years must have passed since the return was in fact filed, regardless when that return was due.
To meet this condition you must have actually filed a tax return—it doesn’t count for the IRS in effect to prepare a tax return on your behalf when you don’t file a return.
3. Have 240 days passed since “assessment” of the tax?
“Assessment” is the IRS’s or other tax authority’s formal determination of your tax liability. This usually happens when it reviews and accepts your tax return, with or without corrections. In most situations an income tax is assessed within a few weeks after you file it. But sometimes it’s delayed because of a disputed tax amount resulting from an audit or a challenge in tax court. Then by the time the accurate tax amount is assessed, the above three-year or two-year time periods may have already passed. That’s when this third condition kicks in: the tax cannot be written off unless the bankruptcy case is filed more than 240 days after this assessment.
4. Have you filed a fraudulent tax return or attempted to evade the tax?
If you are dishonest on your tax return—not including some of your income or claiming inappropriate deductions, or evaded paying the tax somehow, that tax will not be discharged, in spite of meeting the other three time-based conditions.
As stated at the beginning, this blog gives you an idea whether a particular tax debt will get discharged in bankruptcy. But there can be other factors, such as the effect of tax liens, a prior bankruptcy, amended returns, and mistakes on returns. If you owe taxes and are considering bankruptcy, there is no question that you should get solid legal advice. If you are in the Rockwall, Heath, Greenville, Lavon, Wylie, Mesquite, Royse City, Sachse or Rowlett, Texas, contact the Law Office of Carrie Weir. The initial consultation is free. Please call 972-772-3083 or use this form .
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