One of the most common questions we field this time of year is whether personal income tax debt is dischargeable. So many people are under the impression that tax debt can never be discharged in a bankruptcy, but that is not always the case! As with many things in life, and bankruptcy, the answer is not a simple yes or no. Read more to find out if your tax debt might be discharged in a bankruptcy.
Personal Income Taxes May Be Dischargeable
In order for personal income taxes to be dischargeable in a bankruptcy, they must meet certain criteria established by the bankruptcy code. The criteria for determining if tax debt is dischargeable are as follows:
The Tax Returns Must Be Filed By You
The first requirement is that the tax returns must have been filed by you—this means that if the taxing authorities file tax returns on your behalf, the tax debt would not be discharged. Because this is true, it is always important to make sure that you are filing your own tax returns, even if they are late, and even if they have already been filed by the taxing authorities.
The Taxes Must Have Been Due at Least Three Years Prior to the Bankruptcy Filing
The second requirement is that the tax liabilities must be for a tax year for which returns were due to be filed at least three years prior to the date the bankruptcy is filed—for example, the 2018 taxes were due to be filed in April of 2019, so in order to be discharged in a bankruptcy, the bankruptcy must be filed after that same due date passes in April of 2022.
The Taxes Must Have Been Filed at Least Two Years Prior to the Bankruptcy Filing
The third requirement is that the tax returns must have been filed at least two years prior to your bankruptcy filing. This requirement is important because if you have old tax debt that would otherwise be dischargeable, but you filed the taxes right before the bankruptcy filing, they WILL NOT be discharged in the bankruptcy. (NOTE: There is also some case law that says that late filed returns cannot be discharged, but, at this point, it seems to be very case specific and is not a hard and fast rule—this is why it is very important to try to file on time).
There Must Not Have Been an Assessment within the 240 Days Prior to Filing
The last requirement is that there must not have been an assessment for the given tax years in the 240 days prior to the bankruptcy filing. This is the trickiest and most difficult requirement to pin down because you do not always know if there is an audit taking place or if there has been an assessment. This requirement is the main reason that we are never really able to tell you with 100% certainty that your taxes will be discharged by your bankruptcy.
How Do You Know?
The best way to know if the taxes you owe are dischargeable is by requesting your tax transcripts from the IRS. You can request one here: https://www.irs.gov/individuals/get-transcript. If you request a transcript, it will ask you what type you would like, and for the information you are looking for, you would want to request the “Account Transcript.” This will show you when your returns were filed, how much you still owe on them, if there were any assessments, and more.
Other Bits and Pieces
-There is also a provision that taxes may not be discharged if there has been willful evasion
-Even if they would not be dischargeable in a bankruptcy, it is always a good idea to file your own returns even if the taxing authorities file them for you because you may have deductions/exemptions/credits that were not applied, which could decrease your liability
-If you requested an extension, you would need to wait to file your bankruptcy until 3 years past the extension deadline (October rather than April).
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LET US HELP! Even if your taxes are not dischargeable, there may be other ways that we can help, and we would be happy to discuss them with you! When the time is right, or when you are ready to get your life back, reach out to Minnesota’s most kind and helpful bankruptcy law firm by going to www.lifebacklaw.com. You will be so thankful you did!