14 Oct Bankruptcy And Discharge Of Taxes
We all know the famous saying that there’s nothing more certain in life than death and taxes. Well, we haven’t figured out how to cheat death yet, but bankruptcy can help solve your tax problem. Keep in mind that not all taxes are dischargeble.
If you owe taxes based on your income all you need to remember is “3, 2, 240”. If you fit the rule, you can discharge your tax obligation in a bankruptcy case. There are three steps to the rule, so follow closely.
Step 1– “3”. If the last date to file your taxes was more than three years before you file for bankruptcy, you fit step one. Now we all think of April 15th as being the date to file for taxes, but be aware, there are circumstances when that might be a different date. The most common would be receipt of an extension of time to file your return to August 15th or October 15th. So more than three years will have to have passed from that deadline, even if you filed your taxes beforethe deadline.
An example: You receive a deadline of October 15, 2009 to file your taxes but do so on September2, 2009. If you owe taxes as a result of that tax return, you cannot file before October 16, 2012 to make those taxes dischargeable.
Step 2– “2”. At least two years must have passed since that tax return was filed. Wait, what? I thought you said I had to wait three years after I filed the taxes? No, I said you had to wait three years from when the tax paperswere due. So the example I set out above is correct. But, what if you filed the forms after the due date? Then not only do you have to wait three years from when the return was due, but you also have to wait two years from you finally filed that return after the due date. Here’s an additional trap to avoid – “filed” means actually received by the taxing authority, not when you mail it or otherwise transmit it to the taxing authority. [For you lawyers out there, the “mailbox rule” does not apply to taxes, that return must be logged as received. Get a tax transcript from the taxing authority to find out when they got it.]
An example: You received an extension to October 15, 2009 to file your 2009 tax papers, but because you knew you owed money for the taxes and couldn’t pay it, you waited until July 17, 2011 to actually file the return. You have to look at both criteria, three years from the last date to file the return [October 16, 2012}, but also two years from when you actually filed the return [July 17, 2013].
Step 3– “240”. In addition to “3” and “2”, at least 240 days have to have passed since the taxing authority assessedthose taxes. Now, if it has been three years since the taxes were due and two years since you filed those taxes, this should be an easy one to satisfy. The problem is that the bill for the taxes does;t come right away since the taxing authority has to process your papers and compare it to other data it has. Additionally, each time you might offer to compromise that tax bill extendsthe 240 days. It easy to see that if you have made several offers to compromise the tax bill by pay meant of some sort, you could easily eat up 500 of those days in submissions. The time period doesn’t begin again until the taxing authority acts on your request.
There are a couple of other things to consider when looking at bankruptcy to solve your tax problem. The tax return that was filed must not be fraudulent and you must not be guilty of evading taxes. If you like flow charts, take a look at Morgan King’s graphic on Page 26. There are finer points that require consultation with a quality bankruptcy attorney.