Can you eliminate tax debt by filing for bankruptcy?

A: In many cases, you can eliminate tax debt owed to the Internal Revenue Service, Missouri Tax Commission or other taxing agencies. Certain tax obligations are dischargeable or may be managed in bankruptcy. The primary relevant factors (see more specifics below) are the age of the taxes (determined by calculating from the date the returns were last DUE to be filed), the date of assessment of the taxes (determined by the taxing agency), the dates you filed your returns (IF they were filed) and whether you willfully attempted to evade payment of the tax by fraud.

Personal Income Taxes

Contrary to popular belief, you may be able to discharge taxes in bankruptcy. The rules governing income taxes are spelled out in the bankruptcy code under 11 USC 523. To be dischargeable the taxes must have been due at least 3 years ago. So, if filing on April 16, 2012, you may potentially discharge 2008 taxes and prior.

Further, the taxes must have been filed at least 2 years ago. And by filed I mean that you or your CPA filed them, not the IRS or state tax commission. If they filed them then you will not be able to discharge them unless you, if not too late, file an amended return and wait the two years out.

The third requirement related to discharging personal income taxes due is that the assessment must not have come within the past 240 days. This rule is the most tricky one because many factors come into play here. Say for example you are audited and are hit with an assessment and you appeal that assessment. In that case, the 240 days do not start running until after the appeal is concluded and you are assessed. Additionally, if you submit an offer in compromise, the 240 days do not run during the time the IRS is considering your offer. Moreover, once the offer in compromise is decided you have to wait an additional 30 days on top of the 240 days before the tax liability is dischargeable.

Last, but not least, if you are found to have filed a fraudulent return or willfully attempted in any manner to evade or defeat the taxes owed your tax liability will not be discharged regardless of the above factors.

Tax Liens

Keep in mind that even if you are able to discharge a tax debt as described above, if you already have a tax lien against your property or another asset, that lien is not going to go away by filing bankruptcy; even if you are able to discharge the underlying tax liability. I can talk to you about this if it applies and, perhaps, work out some arrangement to have that lien lifted before you file. However, even if you do have the tax lien remaining on your property, the lien will go away after 10 years.

Property Taxes

Any property taxes are dischargeable after one year from when a penalty begins accruing. The same caveat stated above in regards to tax liens applies here. However, keep in mind that you will be able to repay the property taxes (and income taxes above for that matter) interest and penalty-free on your terms and once they are paid the liens will be removed.

What are the Requirements for Discharging Taxes and Tax Debts in Bankruptcy?

The minimum requirements for discharging federal or state income taxes are (all of the following must be met): (1) it has been more than 3 years since the returns were last DUE (including extensions) to be filed, (2) the returns were timely filed or it has been at least 2 years since the returns were filed, (3) there was no fraud involved or attempts to evade the tax, AND, (4) the taxes were not assessed within the last 240 days.

However, even if you cannot get rid of your tax debt fully in a Chapter 7 bankruptcy case, you may be able to discharge some of it and enter into a more favorable repayment plan for the taxes than you otherwise could outside of bankruptcy in Chapter 13 or Chapter 11 case.

Similarly, sometimes sales taxes and other taxes, such as those owed to the State Franchise, or Board of Equalization, or Employment Development Department may also be dealt with in a bankruptcy case.

The most important thing to do if you are having tax problems is to investigate bankruptcy as a possible alternative to dealing with your taxes. This is particularly true if it has been more than three (3) years since the tax returns for the years you owe were last due to be filed.

Our firm handles cases throughout Missouri. Please call my office today for a free bankruptcy consultation, either in my office or by telephone: Contact Us