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What Taxes Can I Discharge in Bankruptcy

Aug. 19, 2016

It is true—certain taxes can be discharged in chapter 7 bankruptcy. The bankruptcy code allows some individual income tax debt to be wiped out forever if a few requirements are met.
I talk about this in this YouTube video.

3 Year Rule

First, the tax return must have last come due at least 3 years before the bankruptcy is filed. Let’s say that you applied for an extension on your 2012 tax returns, which means that the return came due on Oct 15, 2013. Three years from that date is October 15, 2016—that is the earliest date that those taxes would be dischargeable.

2 Year Rule

Second, the return must have been filed, by you, at least two years before the filing of the bankruptcy. This means that if the IRS or state prepared and filed your return for you (“Substitute For Return”), this tax is not dischargeable. If you filed your tax return on time this rule is really irrelevant. It used to be true that if you had unfiled returns, you could prepare and file them, wait two years and file a bankruptcy. It’s not that simple nowadays—we’ll discuss that more here.

240 Day Rule

Third, the tax must have been assessed by the IRS more than 240 days (8 months) before the bankruptcy. Taxes are assessed when the IRS makes a notation on their official record regarding the exact amount of taxes due. The IRS sometimes assesses additional taxes months or years after the original returns were filed, meaning that the new tax assessed would be subject to the 240-day rule.

Tax Evasion Is a No-No

Fourth, if the taxpayer is willfully evading paying taxes, the tax is nondischargeable. This is usually considered to be something more than just not filing the tax returns.

No Fraudulent Returns

And finally, Fifth, fraudulent returns are never dischargeable.

If you have further questions about this or if you need to speak with a bankruptcy attorney in Mesa AZ, please contact my office.