Lately, I’ve been seeing a lot of potential new clients who are burdened with six-figure tax debts. Naturally they want to know if they can discharge this debt in bankruptcy. Until I discover more information, I always respond with, “maybe.” Then I perform the following analysis to determine whether or not the taxes are dischargeable:
Was the return filed by the debtor or by the IRS?
To be dischargeable, the debtor must have filed his own return; not the IRS. Taxes owed as a result of substitute returns filed by the IRS on the debtor’s behalf are not eligible for discharge.
Did the return come due at least 3 years ago?
Tax returns are due on April 15 of each calendar year. The rule is that the return must have come due at least three years ago to be dischargeable. For example: Your 2014 tax return was due on April 15, 2015. So in order to discharge the 2014 taxes that were filed without an extension, you would have to wait until after April 15, 2018 to file your bankruptcy.
Was an extension sought?
If the debtor sought an extension, then the return did not legally come due until October 15, as opposed to April 15. This is an important distinction. To discharge taxes that were filed pursuant to an extension, a debtor would have to wait to file bankruptcy until three years had passed from October 15th of the year in which they filed their tax returns.
Was the return filed at least 2 years ago?
The tax return must have been filed at least two years before the bankruptcy to be subject to discharge.
Were the taxes assessed at least 240 days ago?
The IRS must have assessed (entered the liability on its records) the tax against you at least 240 days prior to your bankruptcy filing.
What type of taxes is the debtor seeking to discharge?
To be dischargeable in bankruptcy, the debt due must be for income tax. Taxes incurred as a result of payroll or other taxes are not dischargeable.
Was the debtor intentionally seeking to evade the tax laws?
Remember: Bankruptcy relief is for the honest debtor. If you are guilty of committing fraud or willful evasion of taxes, you will not be granted the relief of discharging those taxes in bankruptcy.
Did the IRS file tax liens against the debtor’s property?
Tax liens filed against the debtor’s property are not dischargeable in bankruptcy. After a Chapter 7 discharge, the liens would remain until they expired. In a Chapter 13, the tax debt subject to IRS liens is typically paid in the Chapter 13 plan as a secured debt.
It’s important to note that tax laws are complicated; there may be certain exceptions to these rules depending upon the specific set of circumstances. If you want to have an experienced bankruptcy attorney analyze your tax debts for potential dischargeability, contact the McCue Law Firm today: 954-267-9377.