Can Taxes be discharged in Bankruptcy?

Just about everyone you talk to says that Taxes can’t be discharged in bankruptcy but is that really true? Some taxes, particularly income taxes, CAN be discharged in a bankruptcy proceeding if they meet four simple criteria. Here they are:

1. The 3-Year Rule: The tax return giving rise to the tax had to have been due three years before the bankruptcy filing occurred. Keep in mind this includes extensions so if you filed an extension, the three years also gets extended.

2. The 2-Year Rule: The tax return involved had to have been filed at least two years before the filing date.

3. The 240-Day Rule: The taxes had to have been assessed (that means claimed due) at least 240 days before filing.

4. Lack of Fraud/Willful Evasion: There cannot be any fraud or willful evasion of tax obligations. While this is unlikely in most cases, if there was fraud, it’s not dischargeable.

So let’s say you had a federal tax bill associated with your 2007 tax return and are planning on filing bankruptcy on December 31, 2012. You filed an extension so the tax return was due on October 15, 2008. You actually filed the tax return on September 1, 2008.

You meet the 3-Year Rule because it’s more than three years from October 15, 2008 to the time you’re planning on filing.

You also meet the 2-Year rule because you filed the tax return more than two years prior to the bankruptcy filing date.

The 240-Day rule is satisfied because the IRS assessed the tax due no later than when the return was filed in September 2008.

And so long as there wasn’t fraud or willful evasion, your tax debt also satisfies this criteria.

So if you were to file for bankruptcy protection, your 2007 income tax debt would be dischargeable. And the same would apply if it were state income tax debt. So next time you hear that tax debts are not dischargeable in bankruptcy, you’ll know that’s not really correct. If the criteria are met, the tax debts can also be discharged.

Nielsen Law Group handles tax issues and bankruptcy. Call (480) 888-7111 today to schedule your free consultation. You may also submit a web request here.