Most individuals are not aware that taxes can be discharged in bankruptcy. In fact, many of my clients have filed bankruptcy for the sole purpose of discharging tax liabilities. Either through a chapter 7 or a chapter 13, most old tax debt can either be discharged completely or drastically reduced. There are many rules and exceptions to discharging tax debt and one should always obtain a reputable bankruptcy attorney before attempting to do so. Below are the basics to discharging tax debt.
For starters, you cannot discharge any tax debt if a return was never filed. Further, you might not ever be able to discharge a tax liability if the IRS has filed a substitute return on your behalf (even if you later file the return). So rule number one is to make sure the returns have been filed and were filed prior to the IRS or other agency filing a substitute return.
Now that the returns have been filed, we must now look at the second part of the test – what years are you wanting to discharge? Generally speaking, the tax debt must be at least 3 years old from when they were due. So for example, if you owe for 2012 and filed them timely, they were due on April 15, 2013. So, in theory, once April 16, 2016 rolled around, you can discharge 2012 taxes since three years and one day had lapsed since the return was due. If you obtained an extension for 2012 and thus your return was due on October 15, 2013, you must wait until October 16th, 2016 to discharge the 2012 taxes. As of right now, any taxes for 2012 and back can be discharged if they meet the other two parts of the test.
So you have 2012 taxes you want to discharge. And you did not obtain an extension. You meet the first part of the test (older than 3 years). The second part is that the return MUST be filed within 2 years of filing the bankruptcy. Remember, the return must be filed in order to get a discharge! But this rule requires you to wait two years after actually filing them to obtain a discharge on them. For example, let’s say the 2012 return was actually filed on August 1, 2014. We know that 2012 is older than three years because the return was due April 15, 2013 and no extension was requested. However, you would have to wait until August 2nd, 2016 to file to meet the 2 year rule. Also, remember that if the IRS files a substitute return (since you failed to actually file one), you will probably never be able to discharge the taxes. Remember rule number one – file your returns!
The last general rule deals with when the taxes were assessed. This basically means when the taxing authority showed that you owed the debt. The general rule is that the bankruptcy cannot be filed within 240 days of being assessed the taxes. Going back to the example above, 2012 taxes, no extension and filed August 1st, 2014. Let’s throw another caveat in the equation. Let’s say the IRS finally assesses the taxes on February 5, 2016. You meet the 3 year rule and you’ll meet the 2 year filing rule on August 1st, but you cannot file until 240 days after the taxes were assessed on February 5, 2016, which would be around October 2nd, 2016.
Yes, taxes can be discharged! Those are the general rules for dealing with taxes and bankruptcy. Most of the time it is always about TIMING of the filing of the bankruptcy. However, there are MANY exceptions and twists that are far too numerous and far too complex to discuss in this type of forum. One should always consult a bankruptcy attorney that knows tax law if they are trying to eliminate tax debt through a bankruptcy filing. Please feel free to contact me if you are trying to eliminate tax debt through bankruptcy. I have been practicing bankruptcy law for 15 years and obtained a masters in tax law in 2001. I have been helping clients eliminate tax debt for a long time.
Brian S. Limbocker, J.D., LL.M.
Specializing in Bankruptcy and Personal Injury Law
2230 Towne Lake Parkway, Bldg. 800, Ste. 140
Woodstock, GA 30189