If you are financially struggling and need relief from outstanding debt, bankruptcy may be an option. You may owe a substantial amount of back taxes. Back taxes may be dischargeable in bankruptcy. Not all bankruptcy attorneys understand the rules for discharging taxes in bankruptcy. Review your options with a tax professional about discharging back taxes before filing bankruptcy. Filing bankruptcy at the wrong time may cost you thousands in taxes.
Type of Taxes Dischargeable
Income taxes may be dischargeable in bankruptcy. Non-income type taxes are not dischargeable. Non-income taxes include payroll tax, sales tax, trust taxes and fraud penalties.
General Rules for Discharging Income Tax
You can discharge taxes if all of the following conditions are met.
– The tax return filed is not fraudulent or there was not an attempt to willfully evade taxes.
– 3 year / 2 year rule: The tax return was filed more than three years from the due date of the tax return or more than two years ago whichever is later.
– 240-day rule: The tax was assessed more than 240 days ago.
Example 1: 2012 income tax return was filed on March 15, 2013. The 2012 tax return was due on April 15, 2013. 3 years from the due date is April 15, 2016. 2 years from the filing date is March 15, 2015. April 15, 2016 is later than March 15, 2015. The 2012 taxes fall under the 3 year rule. The 2012 taxes are dischargeable starting April 15, 2016.
Example 2: 2012 income tax return was filed late on March 15, 2015. The 2012 tax return was due on April 15, 2013. 3 years from the due date is April 15, 2016. 2 years from the filing date is March 15, 2017. March 15, 2017 is later than April 15, 2015. The 2012 taxes fall under the 2 year rule. The 2012 taxes are dischargeable starting March 15, 2017.
Example 3: 2012 income tax return was filed on March 15, 2013. The 2012 tax return was due on April 15, 2013. 3 years from the due date is April 15, 2016. The IRS audited the 2012 tax return and assessed additional taxes on December 15, 2015. The additional taxes fall under the 240-day rule. The additional taxes are dischargeable 240 days from December 15, 2015 which is August 11, 2016.
No Return Filed or Substitute for Return
Income taxes from unfiled tax returns are not dischargeable in bankruptcy. Furthermore, if the IRS files a tax return for you, the taxes owed are not dischargeable. A return filed by the IRS is called a Substitute for Return. Click here for more information on Substitute for Return.
You are unable to file a tax return after the IRS files a substitute for return for the purpose of getting the taxes discharged.
Example: The taxpayer did not file a 2007 tax return. The IRS files a substitute for return for tax year 2007 in 2010. The taxpayer does not like the substitute return filed by the IRS. The taxpayer files a tax return for tax year 2007 in 2012. The 2007 tax return filed by the taxpayer reduced the taxes owed compared to the substitute for return filed by the IRS. The 2007 taxes were filed more than 3 years from the due date and it has been more than 2 year since taxes were filed. However, the IRS filed a substitute for return first. The courts have ruled that this is considered a non-filed tax return and the taxes owed are not dischargeable in bankruptcy.
For more information on discharging taxes in bankruptcy, please fill out the Contact Us Form. We are more than happy to review your situation further.