The ultimate purpose in filing bankruptcy is to obtain a discharge of most, if not all, of your debts. A bankruptcy discharge releases the debtor from personal liability for certain specified types of debts, i.e., the debtor is no longer legally required to pay those debts that are discharged. The discharge is a permanent order which prohibits the creditors from engaging in any and all forms of collection activity on such debts.
Most taxpayers have the misconception that income taxes are never dischargeable in bankruptcy. This is not true as taxpayers can discharge federal, state, and local income taxes in all three of the most common chapters of the Bankruptcy Code, 7, 11, and 13. The determination of whether a debtor can discharge tax debt will depend of the type of tax, the length of time the tax debt has existed, whether the debtor has filed a return, and the type or chapter of bankruptcy. Also, for any income taxes that are dischargeable, so are the penalties and interest attached to them. The determination as to which back taxes are dischargeable is complex and requires the assistance of a tax or bankruptcy professional.
The Bankruptcy Code lists specific time periods which are the primary factors in determining if taxes may be discharged. These specific time periods are often referred to as the 3-year, 2-year, and 240-day rules. Pursuant to these rules, taxpayers may discharge taxes that came due 3 years before the bankruptcy filing, as long as at least 2 years have passed since the tax returns were filed and 240 days since the taxes were assessed. Under these rules, taxpayers must meet all of the three requirements to discharge their taxes.
Under the 3-Year Rule contained in 11 U.S.C. §507(a)(8)(A)(i), in order to discharge back income taxes, such taxes must have become due at least three years before the bankruptcy case is filed. Usually federal and most state income taxes are anually due on or around April 15th. Thus, in most cases, it is sufficient to simply add three years to this due date to determine the earliest date a bankruptcy case can be filed to effectively discharge taxes.
Under the 2-year rule, income tax returns must have been filed at least two years before filing a bankruptcy petition. This requirement allows taxpayers to discharge even late-filed taxes, provided that the returns were filed at least two years before filing for bankruptcy pursuant to 11 U.S.C. §523(a)(1)(b)(ii). For example, if an individual’s taxes were due on April 15, 2010, but filed on August 1, 2011, and the goal is to discharge these taxes from 2010, a bankruptcy cannot be filed until August 1, 2013 (two years from the date the taxes were filed AND more than three years from the date the taxes were due).
Taxes must be assessed at least 240 days before you file for bankruptcy under this rule or not assessed at all. Assuming the IRS and you agree on the amount of taxes owed, the date of assessment is typically on or near the date you filed your income tax form. However, if you file a correction or a change results from an IRS audit, the assessment date may be substantially later under §507 (a)(8)(A)(ii) of the Bankruptcy Code. Some actions can add additional time to some or all of the 3 year, 2 year, or 240 day requirements, including making an offer in compromise.
Discharging income taxes in bankruptcy does not automatically remove a tax lien. A taxpayer may still file for bankruptcy despite the presence of a tax lien attached to an asset. The underlying debt will be discharged provided the aforementioned time requirements are met. Yet, the lien which existed before filing the bankruptcy case is still a valid lien and cannot be discharged in a Chapter 7 nor in a Chapter 13 unless payments are made to the IRS.
The 3-2-240 rules apply to federal, state, and local income taxes. (New York income tax is dischargeable in bankruptcy.) However, these rules do not apply to other types of taxes, such as property taxes.
If you have questions about whether your delinquent taxes may be discharged in a bankruptcy case, call the TAX EXPERTS AT the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704
