Top 15 Lies About Bankruptcy. Lie #13: You Can’t Get Rid of Back Taxes in Bankruptcy.

by Brett Weiss, Esq.

February 7, 2013

Lie #13: You Can’t Get Rid of Back Taxes in Bankruptcy.

Truth-o-Meter: 

We have gotten rid of millions of dollars of back taxes–both federal and state–for our clients. Even if your return was filed late, as long as enough time has passed, the taxes are still dischargeable.

But not all taxes can be discharged. There is a five part test for being able to get rid of, or discharge, taxes.

First, they can’t be “trust fund taxes.” What are these? The amount that, as an employer, you withhold from your employees’ paychecks. Typical examples are sales taxes and payroll taxes withheld from an employee’s paycheck. These basically are taxes where you’re holding someone else’s money. Trust fund taxes are not dischargeable in bankruptcy no matter how old they are or when they were filed.

Income taxes and inheritance taxes are NOT trust fund taxes. 

Second, the tax return can’t be fraudulent, and you can’t be guilty of tax evasion.

Third, the due date for filing the return must be at least three years before you file. So, since your 2011 tax return was due by April 17, 2012, assuming you meet the other parts of the test, your 2011 taxes would be dischargeable if you file bankruptcy after April 17, 2015.

Fourth, you must file the tax return itself at least two years before you file. This means that a six month extension for your 2011 taxes, to October 2012, would not change the earliest date the taxes would be dischargeable. But if you file a couple of years late, or if the IRS files a “Substitute for Return” (which doesn’t count as you filing to start the two year period running), you may need to wait. As of the writing of this blog, in some jurisdictions, once the IRS files a SFR, the taxes are never dischargeable in bankruptcy.

Finally, the taxes need to have been assessed at least 240 days before you file. Normally, this isn’t an issue, since taxes are usually assessed within 30-60 days after the return is received by the IRS. But if there is an audit, an amended return, or other issues, the assessment could be much later.

Be sure to pull your “tax transcript” from the IRS before you file to make sure that waiting a few weeks or months won’t result in a lot more tax debt being discharged. This is a pretty complex issue, and you should speak with an experienced bankruptcy attorney to make sure things are timed properly.

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Brett Weiss, a senior partner at Chung & Press, LLC, represents people and businesses in all phases of bankruptcy. He has experience in complex individual Chapter 7, Chapter 11 and Chapter 13 bankruptcy cases, and in Chapter 11 small business restructuring and reorganization. Mr. Weiss lectures nationally on bankruptcy issues. He has testified before the Federal Bankruptcy Rules Committee, the Consumer Financial Protection Bureau, and has twice testified before Congress on bankruptcy and credit issues. Brett Weiss is the co-author of Chapter 11 for Individual Debtors, and has written Not Dead Yet: Bankruptcy After BAPCPA, for the Maryland Bar Journal, as well as hundreds of blogs for the Bankruptcy Law Network. With his law partner, he recorded a 13-hour basic bankruptcy training series, and leads intensive three-day Chapter 11 training boot camps. Mr. Weiss has received international media attention in connection with his work. He was interviewed by Barbara Walters on The View, has appeared on the Today Show, Good Morning America, ABC News with Peter Jennings, the Montel Williams Show, National Public Radio, AARP-TV, the BBC World Service, German state television, and numerous local radio and television programs, and been quoted in Money magazine, The Washington Post and The Baltimore Sun, among others. Brett Weiss is the Maryland State Chair for the National Association of Consumer Bankruptcy Attorneys, a founding member of the Bankruptcy Law Network, on the board of the Maryland State Bar Consumer Bankruptcy Council, and a member of the American Bankruptcy Institute, the Bankruptcy Bar Association of Maryland, and the Civil Justice Network. He has been recognized as a “Super Lawyer” every year since 2007 for Maryland and the District of Columbia, and in 2011 received the Distinguished Service Award from the National Association of Consumer Bankruptcy Attorneys for his work on behalf of consumers across the country. Mr. Weiss is admitted to practice before Maryland and District of Columbia federal and state courts, the United States Courts of Appeals for the DC, Fourth and Eighth Circuits, The United States Tax Court, and the Supreme Court of the United States, and has been practicing law since 1983.

Last modified: February 7, 2013