You can discharge old income taxes. Many people don’t know that it’s possible to discharge old income taxes in bankruptcy. This applies to the IRS, state income taxes, and municipal taxes.
There are three general rules that initially determine whether or not you can discharge income taxes in bankruptcy; these are known as the three-year rule, the two year rule and the 270 day rule. The rules can be simply paraphrased as follows.
If on the day you file a bankruptcy you for tax year that occurred three years prior to the day you file bankruptcy, and the tax return was timely filed at least two years prior to the filing of the bankruptcy, and you have not been assessed within 270 days before the filing of the bankruptcy, then it may be possible to discharge your old income taxes.
There are additional rules that must be considered in determining whether or not you can discharge your taxes in bankruptcy. In the end the analysis must include a review of your tax history by a qualified professional.
Even if is not possible to completely discharge your tax in bankruptcy, at a minimum, under chapter 13 it is possible to stop the addition of future penalties and interest, reduce the penalties you currently owe, and set up a plan to repay the tax over the next five years. This relief applies to all taxes you owe including such taxes as sales tax and employer withholding taxes. You can also use chapter 13 to pay other tax like obligations as well such as past-due premiums on workers compensation and unemployment.
Discharge Most Debts
Common exceptions are:
most taxes, student loans, and support obligations.
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Both income and employment taxes can be discharged in a chapter 7 bankruptcy along with the accumulated penalties and interest. Employment taxes should not be confused with "trust fund taxes" or withholding taxes that an employer is required to deduct from an employee's paycheck and remit to the taxing authority. Employment taxes are taxes on the employer or the matching portion of the “trust fund tax."
- To be eligible to be discharged in bankruptcy, first, the tax itself cannot be the subject of a tax lien. The tax must be “unsecured”, meaning the taxing authority has not filed a notice of lien.
- Second, the tax owed must be for a tax year ending more than three years prior to the filing of the bankruptcy, computed from the date the tax return should have been filed (including extensions) to the date of the filing of the bankruptcy. For example if the tax return for taxes owed for 2010 is due by April 15, 2011, any bankruptcy filed before April 16, 2014 will not discharge this tax. In addition if an extension for filing the tax return was obtained the additional time for the extension must be added to this calculation.
- Third, the tax return itself must have been filed at least two years prior to the filing of the bankruptcy. Courts have interpreted this rule to mean the date the IRS actually assessed the tax and not to date the taxpayer put the tax return in the mailbox. The assessment date can only be obtained from reviewing the IRS transcript of account. Using our example of taxes owed for 2010. Let us assume the tax was filed late and was not filed and assessed until April 15, 2012. The 2010 income tax will be eligible for discharge on April 16, 2014.
4. Fourth, the taxes owed must have been assessed more than 240 days prior to the filing of the bankruptcy. This time is extended for the full time following an assessment where there has been an offer in compromise plus an additional 30 days. This time period is also extended were collection proceedings were suspended, during the 240 days, plus an additional 90 days.
5. Fifth, for all of the rules to take effect the taxpayer must have filed an actual return and not what is referred to as a "substitute for return." A substitute return filed by the taxing entity on behalf of the taxpayer will not qualify the tax to be discharged in the bankruptcy. For a tax to be dischargeable in chapter 7 bankruptcy a taxpayer must have filed the return.
6. Finally, the tax return itself must not be -fraudulent and the taxpayer must not have engaged in any willful evasion to invade the tax liability. The taxpayer need not have committed actual fraud to have filed a fraudulent return. Courts have looked to a number of different behaviors to determine that a tax return was either fraudulent, or the tax payer engaged in willful evasion of the tax. These behaviors include such things as a gross understatement of income, the failure to file a tax return or filing late returns, implausible behavior by a taxpayer, failure to cooperate with the IRS, and depositing income in someone else's bank account, have all been concluded to be indications that tax fraud may have existed.
Discharging income taxes in bankruptcy can be a very complex calculation. It is always advisable to consult an experienced bankruptcy attorney before attempting to determine if a particular tax can be discharged in bankruptcy.