Bankruptcy Taxes

Can You Discharge Income Taxes in Bankruptcy?

Yes, you can!

Not all taxes, but more than you think.

If your taxes are income taxes, and the return was due more than three years ago, and you filed the return more than two years ago, and the tax was assessed more than 240 days ago, yes you can. This is the interplay between code sections 11 USC Sec. 507 and 11 USC Sec. 523(a).

There are events that extend those deadlines, such as prior bankruptcies or prior offers in compromise, but that is the basic rule in Ohio.  (I say in Ohio, even though Bankruptcy is Federal law, because in at least one jurisdiction, the Fifth Circuit Court of appeals, the courts have ruled otherwise.  Fortunately, we are not in that jurisdiction.)

This is a bit technical, to be sure. To start the process and confirm that all conditions are met requires careful analysis of your tax transcripts for each tax year.  The important point is that income tax obligations can be discharged, and to accomplish that, timing is everything.

Technical hurdles can create a trap.

The Due Date Trap

For example, most tax returns are due on April 15 of each year.  So, for the 2013 tax year, your tax return is due April 15, 2014. That is the start date of the three-year rule.  That is the general rule.  Even if you file your tax return early, the measuring date is the due date, April 15.  However, check year by year.  For 2014 income taxes, the due date was April 17, 2015.  And for 2015 income taxes, the return due date was April 18, 2016. The due date can vary by a few days based on nearby holidays, so carefully check for each year. Filing your bankruptcy case even one or two days before the end of that deadline makes the difference between discharging the tax, or remaining liable to pay the tax. And for the 2019 tax year, the deadline was extended to July 15, 2020.  So, it will be longer before 2019 income tax obligations can be discharged.

The Extension Trap

If you did not file your income tax return by the initial deadline, in some cases the IRS automatically extends the deadline to an August deadline. Or you or your accountant may have requested an extension to October.  If either occurs, then the August or October deadline starts the running of the three-year time period. So, if you file your bankruptcy case three years after the April deadline, you have filed too soon and will not get a discharge on the income tax debt for that year.

The Tolling Trap

Maybe you or your accountant tried one or more offers in compromise. That will extend the time you have to wait by the entire period the offer was under consideration plus an additional 30 days. Or maybe you filed a prior bankruptcy case. That will extend the time for the entire period of the bankruptcy plus an additional 90 days.  Beware of offers in compromise. Very few offers in compromise get accepted by the IRS and the effort extends the deadline to discharge the tax, and also extends the IRS collection deadline.

The Failure to File a Tax Return Trap

Some people feel so much distress about their inability to pay a tax when due, that they do not file a return.  Please do not do that.  Always file your return, even if you cannot pay the tax due, and even if you think you can never pay the tax due. At some point, the IRS will prepare what they call a ‘substitute for return.’  You cannot get a discharge on taxes due for a year where the IRS files a substitute for return. Bankruptcy can still help because even in that situation you can ask the Bankruptcy Court to decide the correct amount of tax due. That amount will always be less than the amount initially determined by the IRS, but that correct amount of tax will not be discharged. So, the best choice is to file your return. File it on time even if you cannot pay. Then, if necessary, seek competent legal advice.

Yes, it is technical, but, with care and planning, it can be done!  You can get a discharge on income tax debt.

Even if a tax lien has been filed, you can obtain a discharge on the tax. In a Chapter 13, you can often get rid of the lien, but in any event the lien at some point will expire.

So, if you have tax debt, and are considering bankruptcy, please do not wait until you are so stressed that you have to file on an emergency basis.  Emergencies are the enemy of care and planning.  Get advice from an experienced Bankruptcy attorney while you still have time to think and plan.