The Three Year Rule for Getting Rid of Income Taxes in Bankruptcy

19 Oct The Three Year Rule for Getting Rid of Income Taxes in Bankruptcy

Everyone knows that you can’t discharge income taxes in bankruptcy. Right? No,not right at all. This misconception about bankruptcy law illustrates just why you shouldn’t substitute cocktail party gossip for the advice of a good lawyer. Especially when the question involves discharging income taxes in a consumer bankruptcy case.

Generally, income taxes are discharged in a chapter 7 or chapter 13 bankruptcy case when the tax is four years old or more. (For those readers who owe substantial income taxes and who are learning this here for the first time, kindly place your eyeballs back into their sockets and read on for some additional qualifications.)

It’s not accomplished through special legal wizardry; in fact it’s routine and it happens automatically in most cases where the legal tests are met.

How is this possible? Because of bankruptcy code section 523(a)(1), which lays out the tests for determining whether your income taxes can be discharged.

First, the tax must be owed for a year where three years have passed since the tax return was due. Most of the time, the return was due on April 15.

Second, the return must have been filed more than two years ago. Obviously, thisrule applies only to late filers.

Third, the tax must not have been assessed with the last 240 days. This rule applies where the return didn’t accurately show all the tax that was owed, and the IRS justfinished assessing additional taxes after discovering your mistake.

Fourth, if you wilfully attempted to evade or defeat payment, it can’t be discharged. Courts have ruled that simple non-payment, without anything more, is not enough to show that you tried to evade or defeat payment of the tax.

Sections 523 and 507 of the bankruptcy code doimpose some additional requirements, butwhat has been written above isenough for most people to know. If you filed your tax return on time, and if the return was accurate, and if it’s been more than three years since the return was due at the latest (usually April 15 ofa givenyear), then your taxes are going to be discharged if you file for bankruptcy, unless a specific exception in the law applies to you. It’s that simple.

If you owe income tax that you can’t pay, here is what you now know you should do: first, try to avoid listening to legal advice about bankruptcy from well-meaning friends at cocktail parties, and second, get yourself to a bankruptcy lawyer to find out for sure if your income taxes are dischargeable in bankruptcy.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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