Some income tax debts are eligible for discharge under Chapter 7 or Chapter 13 of the Bankruptcy Code.
Chapter 7 discharges the legal obligation to pay back all allowable debts. Chapter 13 allows folks to repay some debts, with the rest of debts being discharged. Under the bankruptcy laws, tax obligations are treated similarly in both Chapter 7 and Chapter 13 cases. Not all tax obligations can be discharged in bankruptcy. You have to meet five requirements in order to discharge taxes.
Five Rules to Discharge Taxes
The income tax debt must meet all five rules, in order to be dischargeable in Chapter 7 and Chapter 13 cases.
- The due date for filing a tax return is at least three years ago.
- The tax return was filed at least two years ago.
- The tax assessment is at least 240 days old.
- The tax return was not fraudulent.
- The taxpayer is not guilty of tax evasion.
Tax Return Due At Least Three Years Ago- The tax must be related to a tax return that was due at least three years before the taxpayer declares bankruptcy. The due date includes any extensions.
Tax Return Was Filed At Least Two Years Ago- The tax debt must be related to a tax return that was filed at least two years before the taxpayer declares bankruptcy. The time starts from the date the taxpayer filed the return.
Tax Assessment Must Be At Least 240 Days Old- The IRS must assess your tax at least 240 days before filing for bankruptcy. This assessment can arise from self-reported balance due, final determination in an IRS audit, or an assessment proposed by IRS which has become final.
Tax Return was Not Fraudulent- The tax return cannot be fraudulent or frivolous.
Taxpayer Not Guilty of Tax Evasion- The taxpayer cannot be guilty of any intentional act of evading the tax laws. No Tax Protesters!
Non Dischargeable Tax Debts- Tax debts that arise from unpaid withholding taxes, unpaid Michigan Sales tax, and unpaid personal property taxes are not going to be dischargeable. Nor will any unfiled tax returns be dischargeable. The IRS will probably assess tax on unfiled returns. These tax liabilities cannot be discharged unless the taxpayer files a tax return for the year in question.
MISC Tax Issues in Bankruptcy- You must have your last four previous tax returns filed no later than the date of the first creditors' meeting in a bankruptcy case.
You will be required to provide a copy of your most recent tax return to the bankruptcy court. Creditors can also request a copy of the tax return, and you’ll have to provide a copy to them.
Collaborative Writing by Rex C. Anderson, Esquire and Contributing Research/Writing by Kellye S. Smith