A common misunderstanding is that a person cannot discharge any taxes in bankruptcy. However, a person can discharge taxes in bankruptcy if certain conditions are met.
The bankruptcy code states that a debt is dischargeable unless it says otherwise. The general rules that govern the discharge of taxes are as follows:
- It must be income taxes;
- It must be more than three years since the due date of the taxes (typically April 15 or October 15 if an extension was filed);
- It must be more than two years since the taxes were filed; and
- It must be more than 240 days since the taxes were assessed.
- The tax payer must not have filed a fraudulent tax return.
- The taxpayer must not have attempted to avoid or defeat the tax.
These are the bare minimum standards for tax discharge liability, however many of these rules are more complicated than they may first appear.
Most of the time periods listed above may be tolled by prior bankruptcy cases. If a bankruptcy case was filed and pending for four months, then you must add four months and an additional 90 days to some of the time periods. Using the three-year or two-year rule and failing to take into consideration a prior bankruptcy case could be a costly mistake. In addition to bankruptcy tolling, there are tolling events for a filed Offer in Compromise, and a Collection Due Process Hearing or appeal.
If the IRS has conducted an audit or filed a Substitute for Return (SFR) on behalf of the taxpayer, that can also be evidence that the taxpayer failed to make an honest attempt to comply with their tax filing obligations. A filed SFR can readily complicate the dischargeability of tax debt. This is made worse so when there are multiple tax years from long ago that the taxpayer failed to file.
State tax debts are just as dischargeable as IRS tax debts. There is nothing about state taxes that prohibit their dischargeability if the IRS tax debts would be dischargeable under the same standard.
Finally, some tax debts are never dischargeable in bankruptcy including 941 quarterly tax deposits. Taxes that were intended to be withheld from an employee’s paychecks and that are not turned over to the IRS or state would not be dischargeable in bankruptcy. Other taxes that are never dischargeable include:
- Property taxes assessed within a year prior to filing (although even if dischargeable, they are typically secured by the property they relate to);
- Payroll withholdings and other trust-fund taxes;
- Employment taxes (940 taxes);
- Many sales taxes; and
- Some excise taxes;
In any case, hiring an experienced bankruptcy attorney with tax resolution experience is important when attempting to discharge taxes. Tax discharge is complicated, and the difference between discharging tens of thousands of dollars in taxes may be simply waiting a few months for one of the time periods to pass. Filing prematurely or without knowing the standard by which your tax debts could be dischargeable could lead to you not receiving the discharge you’re entitled to.
At Kootenai Bankruptcy, our experienced attorney can pull your information directly from the IRS or state tax commission. It’s important to review your unique circumstance with an experienced bankruptcy attorney if you’re considering filing a bankruptcy case in order to maximize the discharge of any taxes you may owe. Call or text us today at (208) 719-0232 to meet our attorney about your bankruptcy case.
