Most people are surprised to learn that incomes taxes may be discharged -- just like credit card debt or medical bills -- in a Chapter 7 bankruptcy. There are some hurdles in place, however, as the IRS is a powerful entity and the obligation to pay taxes is as old as the nation itself. Nonetheless, if these hurdles are overcome, tax levies can be removed, tax garnishments will cease, and the entirety of the tax obligation is extinguished.
In brief, these hurdles are that:
1. The tax return was filed greater than two years prior to the bankruptcy filing;
2. The tax return was due greater than three years before the bankruptcy filing;
3. There has passed in excess of 240 days since the tax was assessed;
4. The return was not fraudulent or evasive; and
5. The return was actually filed by the taxpayer and not the IRS on your behalf.
The best rule of thumb is to ask if you filed your taxes on time and if the due date for them was more than three years ago. Remember that April 15 of the following year is the due date for taxes generated during a employment year. The laws related to discharging taxes in bankruptcy are nuanced and detailed. It is wise to consult with an experienced Norristown bankruptcy attorney before assuming your tax debts are dischargeable.
To more specific, then, in a Chapter 7 filing, an income tax is subject to the discharge if each of the three periods below have elapsed:
1. The return was due in excess of three years before the bankruptcy filing (note that a granted extension will postpone the return's due date for the length of that extension);
2. The return was filed in excess of two years before the bankruptcy; and
3. The tax assessment was more than 240 days prior to the bankruptcy filing (determining the date of an assessment requires looking at various items such as the date of the filing, the date the filing was due, the date the assessment officer signed the assessment notice, the date of the original assessment notice, the form CP-501, etc.)
Chapter 13 is bit more lenient in that the second of those three above time-limiting factors does not apply.
Ultimately, the good news is that income taxes may be discharged in a bankruptcy. And if you are being garnished or levied due to unpaid taxes, that garnishment must cease immediately upon the filing of the case. Of course, bankruptcy serves to terminate a broad spectrum of garnishment, including those from collection lawsuits.
Another thing to consider is that while your older taxes may be dischargeable, you must also be current on your recent filings. The trustee will not conduct your 341(a) examination if your tax returns have not been filed for the last four years. Sometimes, people are exempt from filing returns. In these situations, the debtor is probably okay, but most of us must file returns; it is the law. So if you are "supposed" to file tax returns but have not and seek to have your old tax deficiencies cured through a discharge, you might be running into a wall if you file. The prudent move is to file your taxes for all required years and the re-evaluate. Oddly, you might be in a better position to wait to file the bankruptcy if you discover you owe for any of the years you recently filed for. This can be a short-term headache, for sure, but you want your discharge to be as broad as possible in its application and thereby save you the most money. Of course, there might be reasons to bite the bullet and file now and deal with the consequences of a tax deficiency for a recent year, but the analysis is best if it takes the widest possible view, and this is only possible if you complete your most recent returns. Indeed, it is absolutely required if you seek to get your Chapter 7 discharge at all.
So while this blog occasionally notes that debtors "can" file a bankruptcy without a lawyer (although we caution that you will likely find it difficult, bureaucratic, and requiring more than you anticipated), doing so where taxes are a motivating factor for discharge is cause for extra caution. If you have older taxes that might be subject to discharge, give us a call to discuss your options and consider retaining a bankruptcy attorney to provide you as much assistance in this nuanced realm of bankruptcy law as possible.
