Yes . . . under certain circumstances. If you owe income tax debt, filing a Chapter 7 or Chapter 13 bankruptcy may be a good option for you. As described below tax debts that meet certain criteria can be discharged in a bankruptcy.
Which income tax debts can be discharged? Bankruptcy law does allow the discharge of income tax in both a Chapter 13 and Chapter 7 bankruptcy, but in order to obtain a discharge the tax debt must meet the following 5 criteria:
- Due date for filing the return is at least 3 years old: In order for a tax debt to be deemed dischargeable the due date for the return must be at least 3 years old. In general the due date for any given tax year is April 15th of the following year. For example 2011 income taxes were due April 15, 2012, and could, therefore, be eligible for discharge in a bankruptcy filed after April 15, 2015. (Assuming the other 4 rules are met.) However, if the taxpayer is granted an extension this will extend the due date under this rule. The 3 year period always begins on the date the tax return was due regardless of when the actual return was filed.
- The tax return must have been filed at least 2 years prior to the bankruptcy filing. Even if the tax return was due more than 3 years ago, the actual tax return must have been filed with the taxing authority at least 2 years prior to filing a bankruptcy in order for that tax debt to be discharged. Tax debt assessed for unfiled tax returns cannot be discharged.
- The tax assessment must have been issued at least 240 days prior to the bankruptcy filing. In order to be eligible for discharge the taxing authority must have issued the tax assessment at least 240 days before the bankruptcy is filed. The date the tax is assessed is not the date the return was filed, but the date established by the taxing authority as the date when the amount of tax debt is established and becomes final. The IRS uses the word "assessed" therefore the date is easy to obtain. Other taxing authorities may not use the word "assessed" and therefore the date of assessment is the date when the proposed tax debt is final and can no longer be appealed by the tax payer. Offers in compromise extend the period for discharge during their pendency plus 30 days. Also prior bankruptcy cases during the 240 day period of assessment plus 90 day also extends the period for discharge.
- The Tax return cannot be fraudulent. In order for a tax return to be deemed "filed" for bankruptcy discharge purposes it must not be fraudulent or frivolous
- The Taxpayer must not be guilty of a willful attempt to defeat or evade the tax. Any attempt to willfully evade or defeat a tax debt can make that tax debt non-dischargeable.
What about income tax debts that do not qualify for discharge? A bankruptcy might also be beneficial if you have tax debt that cannot be discharged. A Chapter 13 bankruptcy allows you to make payments to the IRS or other taxing authority over a 3-5 year period and in many circumstances the tax debt will not accrue interest during the bankruptcy.
How do I determine if my tax debts are dischargeable? Determining which tax debts are dischargeable is complicated and should be done in consultation with an experienced bankruptcy attorney. It is a good idea to contact the IRS and request an Account Transcript and Tax Transcript for each year you owe taxes as this information will help the attorney determine important information regarding the due date of the tax return, when the return was filed, when the tax was assessed, etc. . .
Please contact the experienced Southfield, MI bankruptcy attorneys at John A. Steinberger & Associates for a free consultation regarding your tax debts.