Discharging Taxes In Bankruptcy?

As Benjamin Franklin once wrote, “in this world nothing can be said to be certain, except death and taxes.” Although you may never be able to completely rid yourself of tax debt, you may, however, be able to discharge some income tax obligations through bankruptcy.

Types Of Tax Debt That Can Be Discharged in Bankruptcy.

The good news: You may be able to discharge some tax debts by filing bankruptcy. The bad news: Not all tax debt is dischargeable. And, the rules regarding the discharge of tax debt can be complicated.  For starters, only income taxes can be discharged through bankruptcy. Other taxes, such as payroll taxes, real estate taxes, etc., are nondischargeable. It is important to note that if you commit tax fraud or engage in willful tax evasion, then you will lose your ability to discharge the tax under the Bankruptcy Code.

The Rules For Discharging Income Taxes (The 3-2-240 Rules).

Assuming you owe federal or state income taxes, under the Bankruptcy Code, the taxes must be owed from a filed return over 3 years prior. So, for example, if you filed your tax return on April 18, 2016, for your 2015 taxes, you will have to wait until April 18, 2019, before you could file bankruptcy and discharge those taxes.

Note that I said, “from a filed return.” That’s another rule. The tax return needs to be filed at least 2 years prior to filing bankruptcy. Are you avoiding filing that return because you owe taxes? Don’t. You could end up owing the IRS even more, and make the debt nondischargeable in the process.

Finally,  you must also meet the 240 day rule, which provides that the tax must have been assessed at least 240 days before your file your bankruptcy. Generally, the date of the assessment would be the date you filed your return, but there can be some scenarios, such as an audited or amended return, where the assessment date could be different that the return date.

This is a complicated topic, but if you’re facing a mountain of income tax debt, you may be able to reduce or eliminate your tax debt through bankruptcy. Remember, if you avoid your obligation to file returns, you could limit your ability to discharge your tax debt in bankruptcy. A failure to file could have other consequences as well, such as preventing your from obtaining a mortgage modification or other loan to restructure your debt.

If you are considering restructuring or eliminating debt through bankruptcy, call The Mays Law Firm PC at (215) 782-4321, to schedule a free consultation.