While Chapter 7 bankruptcy is used to provide debtors with a fresh financial start, the waters are murkier when the question involves the dischargeability of overdue income taxes. While several factors come into play as to whether income taxes can be discharged (wiped out), there is one constant: income tax returns should be filed at least two years prior to filing bankruptcy. It’s past due taxes themselves that may be discharged through bankruptcy, not the debtor’s obligation to have filed them in the first place.
What are the Criteria?
- Usually only personal income taxes can be discharged by a bankruptcy filing. Payroll or sales taxes and penalties related to their non-payment are generally not dischargeable in bankruptcy.
- Past due taxes must be filed with the IRS at least two years prior to the bankruptcy filing.
- The tax debt must have been due three or more years before the bankruptcy filing.
- The IRS must have assessed the tax at least 240 days before the debtor filed for bankruptcy. While this might seem nonsensical in light of the other, more stringent, time constraints, this rule gains import if the IRS assesses additional tax burdens following an audit. Moreover, this rule applies to both federal and state income taxes, which are often assessed separately.
Complicating the time calculations impacting the dischargeability of taxes in bankruptcy is whether the debtor sought and obtained an extension for the filing of taxes for any year in which they may have owed the IRS. In other words, if extensions for the filing of taxes were granted, then those extension dates must be utilized for determining both whether the taxes were due three or more years before the bankruptcy was filed and whether the tax returns themselves were filed more than two years before the bankruptcy was.
Limiting Factors
Another type of tax debt not dischargeable in bankruptcy is a lien on property imposed by the IRS for past due taxes. However, the amount that is not dischargeable is only equivalent to the value of the tax lien itself. So for example, if a debtor owes $50,000 in back taxes that met the other dischargeability requirements, but the IRS imposed a $5,000 lien on the debtor’s property, the debtor still owes the IRS $5,000.
False tax returns and any penalties assessed on a person for falsifying a tax return are not dischargeable in bankruptcy.
Assessing your situation
Taxes and Bankruptcy can be confusing enough separately, and even more so when they are dealt with together. The experienced attorneys at Lincoln Law are here to help should you have questions pertaining to how taxes are taken into consideration through the bankruptcy process.