I am frequently asked, "Can Bankruptcy help me with Tax Debts?"
Every other week, the same question comes up. Can Income Taxes be discharged in bankruptcy? It’s easiest to understand by going through 5 questions. Each question inquires into the exact nature of the income tax attempting to be discharged. If your tax can pass each qualifying question, your income tax debt will likely be dischargeable:
1. Was the tax return DUE more than 3 years ago?
The tax return on which the tax debt arises must have been due at least three years before you file for bankruptcy. This date is usually April 15 of the year the return was due. If an extension was filed, then it means August 15 or October 15 of that year, or to the actual required filing date.
2. Was the tax return FILED more than 2-Years ago?
The tax return must be filed at least two years before the bankruptcy (having the IRS file a substitute for return doesn’t count).
3. Has 240-Days passed since new tax has been assessed?
All taxes (such as additional tax) must be assessed by the IRS at least 240 days before filing.
4. Was there any Fraud or Willful Tax Evasion present?
There must not be a fraudulent tax return or a willful attempt to evade paying taxes.
5. Was the tax assessed for reasons other than regular Income Tax?
Taxes other than income tax, such as payroll taxes, employee trust fund penalties, fraud penalties, or several other taxes and penalties are by law excepted from bankruptcy discharge.
If your income tax debt can pass these 5 qualifying questions, it is likely that this tax debt would be dischargeable in a Chapter 7 bankruptcy.
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