February 16, 2016

Can I Discharge my Taxes in a Bankruptcy?

Many people are under the assumption that bankruptcy can’t eliminate taxes. But, that is a common misconception. Under Chapter 7, Chapter 13, and Chapter 11, you can discharge federal and state income tax debts. In order to do so, your case must meet the 3-2-240 rule requirements.

The 3-Year Rule

The debt must be at least three years old. To eliminate back income taxes, the tax return must have been originally due at least three years before you filed for bankruptcy. Federal and most state income taxes are typically due around April 15th every year. If your taxes were due April 15th 2015, April 15th 2018 is the earliest date you can file for bankruptcy and have your taxes discharged. However, if you receive an extension to file your return, the three-year rule starts from the day the extension expires.

The 2-Year Rule

Under this rule, your income tax returns must have been filed at least two years before filing. This allows you to discharge back taxes even if you submitted your forms late.

The 240-Day Rule

The IRS must assess your taxes at least 240 days before you submit your petition for bankruptcy or they must not have been assessed yet. However, if you file a correction or a change from an audit, the 240-day clock starts over.

Example: Joe’s income taxes were due April 15th 2014. He didn’t get around to filing his tax return until July 1st 2015. His forms were assessed the same day they were submitted. If Joe wishes to discharge his 2014 taxes, he cannot file for bankruptcy until July 1st 2017 under the 3-2-240 rules. That’s two years from the date he filed his taxes, more than three years from the date the taxes were due, and past 240 days since his taxes were assessed.

Tax Liens

Bankruptcy will not remove prior tax liens. Chapter 7 will wipe out the obligation to pay the debt and prevent the IRS from going after your bank accounts or wages. However, if there was a tax lien on your property before you filed for bankruptcy, the lien will not be discharged.

If you’re considering filing for bankruptcy, the importance of expert legal assistance cannot be overemphasized. At the Law Office of Michael Alan Siddons, we are qualified in dealing with all aspects of bankruptcy law in the states of Maryland, Pennsylvania and New Jersey. We are familiar with common challenges in bankruptcy law and are well versed with the court processes in all three states. Call us today at (610) 255-7500 for a free consultation.