Can I Discharge Income Tax Debt in Bankruptcy?

Discharging income taxes in bankruptcy is a complicated proposition. I will attempt to give you the basic rules that apply, however this should not be taken as legal advice for your particular situation. There are many exceptions to the rules. You should never attempt to file a bankruptcy to discharge income taxes unless you have a competent and qualified bankruptcy lawyer assisting you.

Having said that, it is sometimes possible to eliminate income tax debt (both State and Federal) through bankruptcy. The basic rule is that the taxes must have been due more than 3 years prior to the bankruptcy filing. For instance, tax returns for 2011 were due on April 17, 2012. So at very minimum, any income taxes owed for 2011 cannot be discharged in bankruptcy unless the case is filed after April 17, 2015. Moreover, if you requested an extension to file your taxes, then the three year period starts running at the end of the extension period. The second rule is that the income tax return must have actually been been filed, by the taxpayer, at least two years before the bankruptcy. So using our example, if you file a bankruptcy on April 18, 2015 hoping to discharge 2011 taxes but you only file the 2011 tax return a few months before filing the bankruptcy, then the 2011 taxes cannot be discharged. The third rule is that that taxes must have been assessed at least 240 days before the bankruptcy filing. Assessment typically occurs when the IRS accepts your tax return (usually within a few weeks of you filing it). However, if there is a dispute or later audit causing the amount owed to be adjusted, you cannot file a bankruptcy to discharge that tax year until the total amount due has been finalized (assessed) for the required 240 days. There are, as mentioned, additional complications. For instance, the time periods are tolled (extended) for various events such as making an offer-in-compromise or filing an intervening bankruptcy. Also, tax liens are not expunged from the records even after a chapter 7 discharge. And if a tax return is deemed fraudulent, the taxes would not be dischargable. You MUST have competent legal advice before attempting to discharge income taxes in bankruptcy. Even with such advice, it may simply not be possible to eliminate all of your income tax debt. In such cases, it may be better to bypass Chapter 7 bankruptcy and instead file a Chapter 13 bankruptcy. In a Chapter 13, it may be possible to eliminate those taxes that CAN be eliminated, pay those that can’t frequently without interest or penalty and obtain a lien release upon discharge. Of course, you have to qualify in the first place for whichever chapter you are attempting to file.