Ahh, the New Year is always such a special time. No, not because of The Super Bowl – because it’s tax season! So, tax season is a good time to review the dischargeability of income taxes in bankruptcy.
While this analysis is a good rule of thumb, reviewing your specific tax situation with an experienced bankruptcy attorney is an absolute necessity to ensure the timing of your bankruptcy filing discharges the greatest amount of unpaid income taxes.
A federal or state income tax is dischargeable if all of the following conditions exist:
1. THE THREE-YEAR RULE. The tax became due, taking into account any extensions allowed, more than 3 years prior to the filing. Federal income taxes are due on the first business day after April 14th (usually April 15th) of the year following the tax year, unless taxpayer files an extension. If an extension is filed, Federal income taxes are due October 15th of the year following the tax year.
For example, 2009 taxes became due on April 15, 2010. This means 2009 taxes become dischargeable on April 16, 2013, unless the debtor filed an extension to file the 2009 tax return, in which case the taxes become dischargeable October 16, 2013.
2. THE TWO-YEAR RULE. The taxpayer must have filed a tax return for the tax year(s) in question more than two years before the filing date of the bankruptcy.
So, in the example above, even if the return is for a tax year more than three years old, the debtor must have filed that return more than two years before the bankruptcy is actually filed. The debtor should confirm with the Internal Revenue Service the filing exact date of any return in question.
3. THE 240-DAY RULE. The tax claim was assessed more than 240 days preceding the filing date of the bankruptcy.
This is another potential landmine. The Internal Revenue Service often reviews or audits taxpayer returns and assesses taxes well after the tax year. Once again, if the debtor has been the subject of an IRS audit, or if the debtor has, within the last year, received any correspondence about an older tax return, the debtor must clarify with the IRS the actual assessment date for the older tax.
OFFER IN COMPROMISE. If the debtor made an Offer in Compromise (OIC) regarding this older tax year, the OIC tolls (or extends) the 240 day period by the number of days the OIC overlapped with the assessment plus an additional 30 days. See why you need to talk to an experienced lawyer?
4. Finally, NO TAX IS DISCHARGEABLE if the tax return was fraudulent or if the taxpayer engaged in activity deemed to be a willful attempt to defeat or evade the tax.
See 11 U.S.C. § 523(a)(1)(C) and 11 U.S.C. § 1328(a)(2).
Furthermore, if the IRS or state taxing authority properly perfected a tax lien by recording the lien in the county in which you reside or where you own real property, an additional analysis must take place to determine whether the tax lien can be avoided in bankruptcy.
Seasoned bankruptcy lawyers frequently engage in this analysis, especially in the first three months of the calendar year because there could be an unpaid tax that is on the verge of becoming dischargeable.
Make sure your unpaid taxes are on the forefront of your mind when you consult with a lawyer about bankruptcy. Be prepared to address these rules, and you’ll create a pre-bankruptcy strategy that can best meet your need to discharge older taxes.