Discharging Income Taxes in Bankruptcy

Personal income taxes are an important source of revenue for the operation of our Federal and State government. When the Bankruptcy Code was enacted, the laws made it very difficult to discharge tax debts in bankruptcy with the operations of the government in mind. Getting tax relief by filing bankruptcy is a very difficult process, but not an impossible one. Certain criteria must be met in order for tax debt to be deemed dischargeable. Here are some of the rules when it comes to discharging income taxes.

The Year of Taxes Owed (Three-Year Rule)

Tax owed must be for taxes that were due at least three years prior to the filing of the Bankruptcy. For example, if a Chapter 7 Bankruptcy case is filed on August 15, 2013, then the taxes that are owed from the years 2009 and back could be discharged if the return was filed by the due date of that tax year, which would be April 15, 2009. Many individuals request extensions until August, if this is your case, then the debt will not be discharged unless the Bankruptcy case was filed in November of 2013. If the return was not filed by you (or your tax preparer), and instead was prepared by the IRS, then you do not qualify.

Year of Taxes Filed (Two-Year Rule)

This criterion requires that a tax return for each year in question, be filed at least two years prior to filing the Bankruptcy. This is determined by the date the IRS actually received the return and not the mailing date of the return. In Chapter 13 Bankruptcy, the tax debt may be dischargeable even on the occasion that the return was received by the IRS after the Bankruptcy was filed.

240-Day Rule

The State or IRS must have assessed the income tax debt at least 240 days before the Bankruptcy is filed. This time requirement is very complex, and can be reset by certain events.

No Tax Fraud or Evasion

The statute of limitations on tax liabilities is three years, but if you filed taxes in an attempt to evade or circumvent the tax rules (i.e., willful evasion, concealment of assets, destroying financial documents) then your tax debts will not be discharged and the statute of limitations will no longer be applicable.

If all requirements are met, the taxes owed may be dischargeable using Chapter 7 or Chapter 13 Bankruptcy. Certainty is an absolute necessity in declaring your tax liability. If you are unsure of your Federal Tax history, you can call the IRS at 800-829-1040 and ask them for a “MFTRA-X” which is basically a transcript of your Federal taxes. For Illinois State Tax history you can call 800-732-8866.

Besides some of the criteria mentioned above, there are other factors that might determine your eligibility to discharge tax debts. Given the complexity of tax liability in bankruptcy, it is really important to seek advice and representation from a bankruptcy attorney. As always, the Chicago bankruptcy attorneys at the Law Office of William J. Factor are more than happy to help you with discharging income taxes. Don’t hesitate, pick up the phone and call us at (312) 878-6976 for your free, no-obligation consultation!