Income Taxes and Bankruptcy

With today being April 15, I thought it would be fitting to talk about income taxes and bankruptcy.

There are several conditions that if met will allow a debtor to discharge both state and federal income tax liabilities in a bankruptcy case.

1.  The taxes you owe must be for a tax year more than 3 years prior to the filing of the bankruptcy case from the date the return was due.

For example, if you filed a Chapter 7 bankruptcy on May 1, 2008, taxes that were owed for the years 2004 and before would be discharged if you filed the 2004 return when it was due on April 15, 2005. However, if you received an extension to file the 2004 return until October 15, 2005, then the 2004 tax liability would not be discharged unless you filed the bankruptcy case on or after October 16, 2008.

Be aware that filing your tax return early doesn’t change the dischargeability date. For example, if you filed your tax return before it was due, say on February 1, 2005, the tax debt would still not be dischargeable until April 16, 2008 because the law provides that the taxes are discharged when they became due, which is usually around the 15 of April.

Furthermore, you must have personally filed your income tax return. If the IRS completed a return on your behalf, the taxes owed are not dischargeable.

2.  Your income tax return must have been filed more than 2 years before the date you filed for bankruptcy in Chapter 7 cases.

“Filed” generally means the date the IRS received the return, not the date the debtor mailed the return. In a Chapter 13 case, the tax debt may still be dischargeable even when a return was filed after the bankruptcy case was filed.

3.  The IRS or the state must have assessed the tax debt at least 240 days before the date you filed your bankruptcy case.

The 240-day period is extended during the time an offer in compromise is pending, plus 30 days.

4.  Your income tax return must not be fraudulent, and

5.  You must not have committed any actions that could be considered willful attempts to evade the tax.

Some examples of fraud or willful evasion include concealing or transferring valuable assets, selling assets to friends or family members for less than the fair market value and losing, concealing or destroying financial documents.

The above information is only a basic overview of the topic of discharging income taxes in bankruptcy. You should not rely on it to determine whether or not your personal income tax liability is dischargeable. The law in this area is rather complicated and you should seek the advice of a knowledgeable bankruptcy attorney regarding your personal situation.

If you owe back taxes and would like to know more about how bankruptcy may be able to help you, contact me today to schedule a FREE initial consultation. Just fill out the Contact Dan form on the far right side of the page and click the Submit button and I’ll get back with you as quickly as I can. Or just pick up the phone and call me at 918-615-8260. I’ll answer all of your questions in plain English and give you the straight scoop on the pros and cons of bankruptcy as related to your specific situation.