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Can bankruptcy eliminate tax debt?

If you are someone saddled with debt, including tax debt, it is common to wonder what options are available for relief. Bankruptcy is often a good solution for those suffering under the weight of insurmountable debt, but what if your debt is related to taxes owed?

Many would assume that there are no relief options for tax debt. However, income tax debt may be discharged by bankruptcy in certain circumstances. The process is complex, but the Bankruptcy Code does provide certain periods of time that help determine if your income taxes may be discharged. The time periods are as follows:

3-year rule: Tax liabilities must be from a tax return that was due at least three years prior to filing for bankruptcy. An exception to note is that if the tax return was filed later under an extension, it would be three years after the date the taxes were filed under the extension.

  • For example: Taxes due April 15, 2010 could not be discharged via bankruptcy until after April 15, 2013. If there was an extension and the tax return was filed on October 15, 2010, the bankruptcy could be filed three years after the extension filing date.
2-year rule: Your income tax returns must have been filed at least two years prior to filing for bankruptcy. This means that taxes can be discharged even if they were filed late without an extension.
  • For example: Taxes due April 15, 2010 and not filed until October 15, 2011 (late, but without an extension), could not be discharged until October 15, 2013. This would be at least two years after the return was actually filed and at least three years after the original due date.
240-day rule: The IRS must have assessed your taxes at least 240 days prior to filing for bankruptcy. Note, this is not the date the taxes were filed, but the date they were assessed by the taxing agency. Any amended, corrected or audited returns may have a later date before it would be possible to petition for bankruptcy. Specific due dates should be discussed with a knowledgeable bankruptcy attorney.

Even if the time period conditions are met, there are additional circumstances that would make the debtor ineligible to discharge tax debt. Those situations would be instances of willful tax evasion, fraud and substitute forms filed by the IRS (meaning forms filed by the IRS on behalf of the taxpayer).

The rules governing discharging tax debt are complex. If you have questions about discharging tax liabilities or other types of debt, speak to an experienced bankruptcy attorney prior to taking any action. At the Law Office of Robert C. Nisenson, L.L.C., we can evaluate your situation, help you determine what type of discharge may be available to you and discuss your debt relief options.

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