DISCHARGING INCOME TAXES IN BANKRUPTCY
by Laura J. Margulies, Esq.

There are several conditions that if met will allow a debtor to discharge both state and federal income tax liabilities in a bankruptcy case. These conditions are: First, the taxes that are owed are for the tax year that is more than three years prior to the filing of the bankruptcy case from the date the return was due. For example, if you file a Chapter 7 case on June 15, 2005, taxes that were owed for the years 2001 backward in time would be discharged if you filed the 2001 return when it was due on April 15, 2002. If you received an extension to file the 2001 return until August of 2002, then the 2001 tax liability would not be discharged, unless you filed the bankruptcy case in September of 2005. If you filed the return early, in February of 2002, the tax debt would not be dischargeable until April 16, 2005 because the law provides that the taxes are discharged when they became due, which is usually around the 15 of April. The qualification is that you must have filed the return. It does not qualify if the IRS completed a return on your behalf.

Second, the return had to be filed more than two years before the debtor filed for bankruptcy in Chapter 7 cases. “Filed” generally means the date the IRS received the return, not the date the debtor mailed the return. In a Chapter 13 case, the tax debt may still be dischargeable even when a return was filed after the bankruptcy case was filed.

Third, the IRS or the state must have assessed the tax debt at least 240 days before the filing of the bankruptcy case. The 240-day period is extended during the time an offer in compromise is pending, plus 30 days.

Fourth, the tax return that was filed was not fraudulent; and finally, the debtor did notengage in activity that would be considered willful attempts to defeat or evade the tax. Some examples of fraud or willful evasion include concealing or transferring valuable assets, selling assets to friends or family members for less than the fair market value and losing, concealing or destroying financial documents.

This article is a basic overview of dischargeable taxes, you should not rely on it to determine dischargeability of your particular tax debt. The law in this area is rather complicated and you should review the matter with your attorney who can advise you whether the tax debt that you owe is dischargeable.