When Are Income Taxes Dischargeable in Bankruptcy?

Posted on December 8, 2011 at 2:21pm by

Many people with high income tax debts feel suffocated and do not know how to fix their problems, and they may have read on the internet or even heard from an inexperienced bankruptcy attorney that they cannot get rid of their income taxes in bankruptcy. Contrary to popular bankruptcy myth, however, you can discharge some income taxes in bankruptcy if you meet certain requirements. A knowledgeable Kansas City bankruptcy lawyer can review your finances and help you determine if you meet the five requirements necessary to discharge your income tax liability. If you fail to meet even one of these requirements, you cannot discharge your taxes.

Income Taxes

The taxes must be income taxes. Payroll taxes, sales taxes, taxes withheld pursuant to a business, penalties or other types of taxes are nondischargeable.

The Three-Year Rule

If the tax debt stems from a tax return that was due less than three years before you file bankruptcy, you cannot discharge the tax debt. The tax return must have been due at least three years prior to your bankruptcy filing date. For example, if you owe $10,000 for the 2007 tax year, your return for those taxes would have been due on April 15, 2008. If you file bankruptcy in 2011, you meet the three-year requirement if you file bankruptcy after April 15, 2011. If your taxes were due August 15, 2008 or October 15, 2008 because of an extension, you must wait until August 16, 2011 or October 16, 2011 to file bankruptcy.

The Two-Year Rule

The IRS must have received your tax return at least two years before your bankruptcy filing date. If you owe the $10,000 in taxes for 2007 in the example above and you file bankruptcy on June 1, 2011, you met the two-year requirement if the IRS received your 2007 tax return before June 1, 2009.

The 240-Day Rule

You can only discharge taxes that the IRS assessed at least 240 days before the date you filed bankruptcy. If you meet the other two requirements but the IRS assessed taxes only two months ago because of an audit, you cannot discharge the taxes in a bankruptcy you file today.

Fraud and Tax Evasion

You cannot discharge taxes if you filed a fraudulent tax return or made a willful attempt to evade paying your taxes.

Tax Lien

If the IRS has taken a lien on your property for past due taxes, the taxes are nondischargeable to the extent of your property’s value, even if the taxes are dischargeable otherwise. For example, if you have a total tax debt of $100,000 and you meet all dischargeability requirements, but the IRS has a lien on your personal property worth $8,000, you will still owe the IRS $8,000.

Contact an experienced Kansas City Bankruptcy attorney for a free consultation to determine if your income tax debt is dischargeable.