No topic is rife with more falsehoods and misinformation than the dischargeability (the ability of a bankruptcy to wipe out) of tax debts. In other words, Can I file bankruptcy to eliminate my IRS tax debt? Therefore, I will handle this topic carefully and over the course of several blog posts.
The Basic Rules
To begin with, here are the basic rules. You can discharge debts for federal income taxes in bankruptcy only if all of the following conditions are true:
- The taxes are income taxes. Taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy.
- The tax return must have been originally due at least three years (including all extension periods) before you filed for bankruptcy.
- You must have filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy. Please note that if you don’t file the return, the tax is not dischargeable.
- You did not commit fraud or willful evasion. If you filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes, such as using a false Social Security number on your tax return, bankruptcy can't help. Fraud and willful evasion usually involve some criminal finding by the IRS. This isn’t an issue for most taxpayers but if it is, you have bigger problems.
- You pass the "240-day rule." The income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition. A tax is considered “assessed” when the tax due become final in the IRS books. If you filed a tax return, the assessment date will be shortly after the file date. If the IRS has audited you, the assessment date is when the audited amount is entered into the IRS records. This rule mostly becomes an issue in an audit situation.
- Tax return was due 3 years ago
- You filed the return more than 2 years ago
- No audit, appeals, or OICs
- No fraud
Do you have questions about this topic? Email or call me for a free consultation and we can discuss your situation. (760) 990-1632.